[Federal Register Volume 81, Number 170 (Thursday, September 1, 2016)]
[Rules and Regulations]
[Pages 60418-60575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20832]
[[Page 60417]]
Vol. 81
Thursday,
No. 170
September 1, 2016
Part II
Securities and Exchange Commission
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17 CFR Parts 275 and 279
Form ADV and Investment Advisers Act Rules; Final Rule
Federal Register / Vol. 81 , No. 170 / Thursday, September 1, 2016 /
Rules and Regulations
[[Page 60418]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 275 and 279
[Release No. IA-4509; File No. S7-09-15]
RIN 3235-AL75
Form ADV and Investment Advisers Act Rules
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or
``SEC'') is adopting amendments to Form ADV that are designed to
provide additional information regarding advisers, including
information about their separately managed account business,
incorporate a method for private fund adviser entities operating a
single advisory business to register using a single Form ADV, and make
clarifying, technical and other amendments to certain Form ADV items
and instructions. The Commission also is adopting amendments to the
Advisers Act books and records rule and technical amendments to several
Advisers Act rules to remove transition provisions that are no longer
necessary.
DATES: Effective October 31, 2016.
Compliance Date: See Section III of this final rule.
FOR FURTHER INFORMATION CONTACT: Bridget D. Farrell, Senior Counsel,
Jennifer Songer, Senior Counsel, Betselot Zeleke, Attorney-Adviser, or
Sara Cortes, Assistant Director at (202) 551-6787 or [email protected],
Investment Adviser Regulation Office, Division of Investment
Management, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
rules 202(a)(11)(G)-1 [17 CFR 275.202(a)(11)(G)-1], 203-1 [17 CFR
275.203-1], 204-1 [17 CFR 275.204-1], 204-2 [17 CFR 275.204-2], and
204-3 [17 CFR 275.204-3] under the Investment Advisers Act of 1940 [15
U.S.C. 80b] (``Advisers Act'' or ``Act''),\1\ and amendments to Form
ADV [17 CFR 279.1] under the Advisers Act. The Commission is also
rescinding rule 203A-5 [17 CFR 275.203A-5] under the Advisers Act.
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\1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified, and when we refer to rules under the Advisers Act,
or any paragraph of these rules, we are referring to title 17, part
275 of the Code of Federal Regulations [17 CFR part 275], in which
these rules are published.
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Table of Contents
I. Background
II. Discussion
A. Amendments to Form ADV
1. Information Regarding Separately Managed Accounts
a. Amendments to Item 5 of Part 1A and Section 5 of Schedule D
b. Section 5.K.(1) of Schedule D
c. Section 5.K.(2) of Schedule D
d. Section 5.K.(3) of Schedule D
e. Public Disclosure of Separately Managed Account Information
f. Additional Comments About Reporting of Separately Managed
Accounts
2. Additional Information Regarding Investment Advisers
a. Additional Identifying Information
b. Additional Information About Advisory Business
c. Additional Information About Financial Industry Affiliations
and Private Fund Reporting
3. Umbrella Registration
4. Clarifying, Technical and Other Amendments to Form ADV
a. Amendments to Item 2
b. Amendments to Item 4
c. Amendments to Item 7
d. Amendments to Item 8
e. Amendments to Section 9.C. of Schedule D
f. Amendments to Disclosure Reporting Pages
g. Amendments to Instructions and Glossary
B. Amendments to Investment Advisers Act Rules
1. Amendments to Books and Records Rule
2. Technical Amendments to Advisers Act Rules
a. Rule 203A-5
b. Rule 202(a)(11)(G)-1(e)
c. Rule 203-1(e)
d. Rule 203-1(b), Rule 204-1(c) and Rule 204-3(g)
III. Effective and Compliance Dates
A. Effective Date
B. Compliance Dates
IV. Economic Analysis
A. Introduction
B. Amendments to Form ADV
1. Economic Baseline and Affected Market Participants
2. Analysis of the Amendments to Form ADV and Alternatives
a. Information Regarding Separately Managed Accounts
b. Additional Information Regarding Investment Advisers
c. Costs Applicable to Reporting Information Regarding
Separately Managed Accounts and Additional Information on Form ADV
d. Umbrella Registration
e. Clarifying, Technical and Other Amendments to Form ADV
f. Exempt Reporting Advisers
C. Amendments to Investment Advisers Act Rules
1. Economic Baseline and Affected Market Participants
2. Analysis of the Effects of the Amendments to the Advisers Act
Books and Records Rule
V. Paperwork Reduction Act Analysis
A. Form ADV
1. Changes in Average Burden Estimates
a. Estimated Change in Burden Related to Part 1A Amendments (Not
Including Private Fund Reporting)
i. Amendments Related to Reporting of Separately Managed Account
Information
ii. Other Additional Information Regarding Investment Advisers
iii. Clarifying, Technical and Other Amendments
b. Estimated Changes in Burden Related to Private Fund Reporting
Requirements
c. Estimated Changes in Burden Related to Exempt Reporting
Adviser Reporting Requirements
2. Annual Burden Estimates
a. Estimated Annual Burden Applicable to All Registered
Investment Advisers
i. Estimated Initial Hour Burden (Not Including Burden
Applicable to Private Funds) for First Year Adviser To Complete Form
ADV (Part 1 and Part 2)
ii. Estimated Initial Burden Applicable to Registered Advisers
to Private Funds
iii. Estimated Annual Hour Burden Associated With Amendments,
New Brochure Supplements, and Delivery Obligations
iv. Estimated Annual Cost Burden
b. Estimated Annual Burden Applicable to Exempt Reporting
Advisers
i. Estimated Initial Hour Burden
ii. Estimated Annual Burden Associated With Amendments and Final
Filings
3. Total Revised Burden
B. Rule 204-2
VI. Final Regulatory Flexibility Analysis
A. Need for and Objectives of the Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Rule and Rule Amendments
D. Projected Reporting Recordkeeping, and Other Compliance
Requirements
E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority
Appendix A: Form ADV: General Instructions
Appendix B: Form ADV: Instructions for Part 1A
Appendix C: Form ADV: Glossary of Terms
Appendix D: Form ADV, Part 1A
I. Background
Form ADV is used by investment advisers to register with the
Commission and with the states.\2\ The information collected on Form
ADV serves a vital role in our regulatory program and our ability to
protect
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investors. On May 20, 2015,\3\ we proposed amendments to Part 1A of
Form ADV in three areas: Revisions to fill certain data gaps and to
provide additional information about investment advisers, including
their separately managed account business; amendments to incorporate a
method for private fund adviser entities operating a single advisory
business to register with us using a single Form ADV; and clarifying,
technical and other amendments to existing items and instructions.\4\
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\2\ Information on Form ADV is available to the public through
the Investment Adviser Public Disclosure System (``IAPD''), which
allows the public to access the most recent Form ADV filing made by
an investment adviser and is available at http://www.adviserinfo.sec.gov.
\3\ See Amendments to Form ADV and Investment Advisers Act
Rules, Investment Advisers Act Release No. 4091 (May 20, 2015) [80
FR 33718 (June 12, 2015)] (``Proposing Release'').
\4\ In general, this Release discusses the Commission's rule and
form amendments that will affect advisers registered with the
Commission. We understand that the state securities authorities
intend to consider similar changes that affect advisers registered
with the states, who are also required to complete Part 1B of Form
ADV as part of their state registrations.
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Several of the amendments to Form ADV relate to separately managed
accounts. These amendments will require advisers to provide certain
aggregate information about separately managed accounts that they
advise. Other amendments to Form ADV that we are adopting are designed
to improve the depth and quality of information that we collect on
investment advisers, facilitate our risk monitoring initiatives and
assist our staff in its risk-based examination program. Moreover,
because Form ADV is available to the public on our Web site, these
amendments also are intended to provide advisory clients and the public
additional information regarding registered investment advisers.
We are also adopting amendments to Part 1A that will provide a more
efficient method for the registration on one Form ADV of multiple
private fund adviser entities operating a single advisory business
(``umbrella registration''). The staff has provided guidance to private
fund advisers regarding umbrella registration,\5\ and the amendments to
incorporate umbrella registration into Form ADV will make the
availability of umbrella registration more widely known to advisers.
Uniform filing requirements for umbrella registration in Form ADV will
provide more consistent data about, and create a clearer picture of,
groups of private fund advisers that operate as a single business.
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\5\ See American Bar Association, Business Law Section, SEC
Staff Letter (Jan. 18, 2012), available at http://www.sec.gov/divisions/investment/noaction/2012/aba011812.htm (``2012 ABA
Letter'').
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The last set of amendments to Part 1A of Form ADV includes
clarifying, technical and other amendments that are based on our
staff's experience with the form and responding to inquiries from
advisers and their service providers. These amendments should make it
easier for advisers to understand and complete the form.
Separate from Form ADV, we are adopting amendments to several
Advisers Act rules. First, we are adopting amendments to the books and
records rule, rule 204-2, to require advisers to make and keep
supporting documentation that demonstrates performance calculations or
rates of return in any written communications that the adviser
circulates or distributes, directly or indirectly, to any person.
Advisers also will be required to maintain originals of all written
communications received and copies of written communications sent by
them related to the performance or rate of return of any or all managed
accounts or securities recommendations. As discussed in the Proposing
Release, we believe that these amendments will better protect investors
from fraudulent performance claims.\6\ Finally, we are adopting several
technical amendments to rules under the Advisers Act to remove
transition provisions that were adopted in conjunction with previous
rulemaking initiatives, but that are no longer necessary.
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\6\ See Proposing Release, supra footnote 3 at Section I.
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We received 50 comment letters on our proposals, most of which were
from investment advisers, trade or professional organizations, law
firms and consultants.\7\ Commenters generally supported the goals of
the proposal. The majority of comments focused on reporting of
separately managed accounts and umbrella registration. Several
commenters supported collection of information on separately managed
account clients, but many raised concerns about the public availability
of the information and reporting on derivatives and borrowings. A
diverse group of commenters supported umbrella registration. Commenters
also generally supported the amendments to certain Advisers Act rules.
We are adopting the proposed amendments with several modifications to
address commenters' concerns. We discuss these modifications and
concerns below.
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\7\ Comment letters submitted in File No. S7-09-15 are available
on the Commission's Web site at http://www.sec.gov/comments/s7-09-15/s70915.shtml. We also considered those comments submitted in File
No. S7-08-15 (Investment Company Reporting Modernization, Investment
Company Act Release No. 9776 (May 20, 2015) [80 FR 33589 (June 12,
2015)]) that addressed the amendments adopted in this Release. Those
comments are available on the Commission's Web site at http://www.sec.gov/comments/s7-08-15/s70815.shtml. We also note that in
December 2014, the Financial Stability Oversight Council (``FSOC'')
issued a notice requesting comment on aspects of the asset
management industry, which includes, among other entities,
registered investment advisers. Although this rulemaking is
independent of FSOC, the notice included requests for comment on
additional data or information that would be helpful to regulators
and market participants. In response to the notice, several
commenters discussed issues concerning data that are relevant to
this rulemaking, including data regarding separately managed
accounts that was cited and considered as part of the Proposing
Release.
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II. Discussion
A. Amendments to Form ADV
1. Information Regarding Separately Managed Accounts
Several of the amendments to Form ADV that we are adopting are
designed to collect more specific information about advisers'
separately managed accounts. For purposes of reporting on Form ADV, we
consider advisory accounts other than those that are pooled investment
vehicles (i.e., registered investment companies, business development
companies and pooled investment vehicles that are not registered
(including, but not limited to, private funds)) to be separately
managed accounts. As we discussed in the Proposing Release, we
currently collect detailed information about pooled investment vehicles
that advisers manage, but little specific information about separately
managed accounts.\8\ We believe that collecting additional information
about separately managed accounts will enhance our staff's ability to
effectively carry out our risk-based examination program and other risk
assessment and monitoring activities. We discuss below the specific
separate account reporting requirements. Commenters stated that they
generally understood our interest in collecting additional data on
separately managed accounts,\9\ but many raised concerns
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regarding separately managed account reporting as proposed, and we
discuss those concerns below.
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\8\ See Proposing Release, supra footnote 3 at Section II.A.1.
\9\ See, e.g., Comment Letter of Blackrock, Inc. (Aug. 11, 2015)
(``BlackRock Letter''); Comment Letter of Dechert LLP (Aug. 11,
2015) (``Dechert Letter''); Comment Letter of Investment Adviser
Association (Aug. 11, 2015) (``IAA Letter''); Comment Letter of
Investment Company Institute (Aug. 11, 2015) (``ICI Letter'');
Comment Letter of Invesco Advisers, Inc. (Aug. 11, 2015) (``Invesco
Letter''); Comment Letter of LPL Financial LLC (Aug. 11, 2015)
(``LPL Letter''); Comment Letter of Managed Funds Association (Aug.
11, 2015) (``MFA Letter''); Comment Letter of Money Management
Institute (Aug. 11, 2015) (``MMI Letter''); Comment Letter of
Morningstar, Inc. (Aug. 12, 2015) (``Morningstar Letter''); Comment
Letter of North American Securities Administrators Association, Inc.
(Aug. 11, 2015) (``NASAA Letter''); Comment Letter of National
Regulatory Services (Aug. 11, 2015) (``NRS Letter''); Comment Letter
of OppenheimerFunds, Inc. (Aug. 10, 2015) (``Oppenheimer Letter'');
Comment Letter of Charles Schwab & Co., Inc. (Aug. 11, 2015)
(``Schwab & Co. Letter''); Comment Letter of Securities Industry and
Financial Markets Association, Asset Management Group and Asset
Managers Forum (Aug. 11, 2015) (``SIFMA Letter''); Comment Letter of
the Systemic Risk Council (Aug. 7, 2015) (``SRC Letter''); Comment
Letter of T. Rowe Price Associates, Inc. (Aug. 11, 2015) (``T. Rowe
Price Letter''). However, certain commenters expressed their
disapproval of the collection this data. See Comment Letter of The
Alternative Investment Management Association Limited (Aug. 6, 2015)
(``AIMA Letter'') (stating that this data should not be collected
unless kept confidential).
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a. Amendments to Item 5 of Part 1A and Section 5 of Schedule D
Item 5 of Part 1A and Section 5 of Schedule D currently require
advisers to provide information about their advisory business including
percentages of types of clients and assets managed for those clients.
We had proposed to collect information specifically about separately
managed accounts, including types of assets held, and the use of
derivatives and borrowings in the accounts.\10\ We are adopting the
amendments to Item 5 of Part 1A and Section 5 of Schedule D largely as
proposed, with some modifications in response to comments we received,
as discussed below. We are amending Item 5 of Part 1A and Section 5 of
Schedule D to require advisers to provide information on an aggregate
level regarding separately managed accounts that they manage.\11\
Advisers will be required to report information about the types of
assets held and the use of derivatives and borrowings in separately
managed accounts. Advisers that report that they have regulatory assets
under management attributable to separately managed accounts in
response to new Item 5.K.(1) of Part 1A will be required to complete
new Section 5.K.(1) of Schedule D, and may be required to complete new
Sections 5.K.(2) and 5.K.(3) of Schedule D regarding those accounts.
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\10\ See Proposing Release, supra footnote 3 at Section II.A.1.
\11\ See infra Section II.A.2.b. for a discussion of other
amendments to Item 5 of Part 1A.
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b. Section 5.K.(1) of Schedule D
In Section 5.K.(1) of Schedule D advisers will be required to
report the approximate percentage of separately managed account
regulatory assets under management that are invested in twelve broad
asset categories, modified from the ten that were proposed in response
to comments received and discussed below. As proposed, advisers with at
least $10 billion in regulatory assets under management attributable to
separately managed accounts will report, on an annual basis, both mid-
year and end of year \12\ percentages while advisers with less than $10
billion in regulatory assets under management attributable to
separately managed accounts will report only end of year percentages.
As we stated in the Proposing Release, we believe this information will
allow us to better monitor this segment of the investment advisory
industry and identify advisers that specialize in particular asset
classes.\13\ We are adopting the amendments to Section 5.K.(1) of
Schedule D largely as proposed, with some minor modifications in
response to comments we received, as discussed below.
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\12\ As stated in Amended Form ADV, Part 1A, Schedule D, Section
5.K.(1), end of year refers to the date used by the adviser to
calculate its regulatory assets under management, and mid-year is
the date six months before the end of year date.
\13\ See Proposing Release, supra footnote 3 at Section II.A.1.
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While some commenters generally supported the collection of this
information,\14\ others suggested requiring a minimum regulatory assets
under management or number of account threshold for reporting on this
section to minimize burdens on small and mid-sized advisers.\15\ We
recognize that this reporting will impose some burden on all advisers,
including smaller advisers, but we believe that gathering this
information for all registered advisers is important for us to gain a
full understanding of assets held in separately managed accounts
managed by investment advisers of different sizes. This section
requires advisers, on an annual basis, to report aggregate separate
account investments across twelve categories of investments. We believe
that requiring all advisers to separately managed accounts to report
this information will enable us to gain a more fulsome picture of
assets held in separately managed accounts. We have also tailored and
limited the scope of information to be reported and the frequency of
such reporting.
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\14\ See Schwab & Co. Letter (``We support the SEC's efforts to
collect additional data seeking to minimize as much as possible the
burden on regulated entities and the investors they service while
helping the SEC to enhance their ability to conduct risk-based
examinations of advisers.''); BlackRock Letter (``We believe this
information will help the Commission identify which managers
specialize in SMAs that invest in certain asset classes.'').
\15\ Comment Letter of Advisor Solutions Group, Inc. (Aug. 11,
2015) (``ASG Letter''); AIMA Letter (suggesting that advisers with a
small number of separately managed account clients or a small amount
of separately managed account assets under management be exempt from
reporting on separately managed accounts).
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With respect to the categories of investments listed in Section
5.K.(1), we proposed to require advisers to report the approximate
percentage of separately managed account regulatory assets under
management invested in ten broad asset categories.\16\ Several
commenters sought clarification on how to classify assets in certain
categories \17\ Another commenter suggested new categories, such as
``private real estate'' and ``structured products.'' \18\ In response
to that commenter's suggestion \19\ we have included a new category for
``Cash and Cash Equivalents.'' \20\ We also believe that additional
delineation of equity securities would be helpful for our staff and the
public, and accordingly, we have added a ``Non-Exchange-Traded Equity
Securities'' category in addition to the ``Exchange-Traded Equity
Securities'' category, to clarify where to report equities that are not
listed on a regulated securities exchange. This information will assist
our examination staff in monitoring risks associated with advisers
managing separately managed account assets in securities that are not
exchange traded.
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\16\ Proposing Release, supra footnote 3 at Section II.A.1.
\17\ LPL Letter; MMI Letter. See also Dechert Letter (stating
that advisers may not maintain systems that permit them to
efficiently categorize assets based on asset types in the proposed
amendments); IAA Letter.
\18\ BlackRock Letter. BlackRock also suggested removing
``derivatives'' as a category, because derivatives information for
some advisers will be collected in Section 5.K.(2). We have not
removed ``derivatives'' as a category, because are collecting
different information in Section 5.K.(2) than in Section 5.K.(1).
\19\ BlackRock Letter; MMI Letter.
\20\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(1)(a)-
(b). The text proceeding Section 5.K.(1) gives examples of cash and
cash equivalents, including bank deposits, certificates of deposit,
bankers' acceptances, and similar bank instruments. We also added an
instruction to the text preceding Section 5.K.(1)(a) stating that
advisers should round to the nearest percent when reporting this
information.
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Some commenters also sought clarification about how to report
assets that may be classified into multiple categories.\21\ Commenters
also suggested that advisers be permitted to use reasonable and
documented systems and methodologies for determining
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appropriate asset categories.\22\ We acknowledge that some assets may
be classified into more than one category or require advisers to apply
discretion about which category applies to a particular asset, and
agree that advisers should be permitted to use reasonable methodologies
in selecting a category in which to report such an asset, but should
not double count assets. Accordingly, in response to these comments, we
are adding an instruction to Item 5.K.1 that advisers may use their own
internal methodologies and the conventions of their service providers
in determining how to categorize assets, so long as their methodologies
are consistently applied and consistent with information the advisers
report internally and to current and prospective clients, but should
not double count assets. We believe that providing this flexibility,
which we modeled after an instruction in Form PF, acknowledges that
advisers may categorize the same or similar assets differently based on
different methodologies.
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\21\ Comment Letter of Anonymous (Aug. 11, 2015) (``Anonymous
Letter'') (``derivatives'' category may overlap with others);
Comment Letter of JAG Capital Management LLC (June 24, 2015) (``JAG
Letter'') (convertible bonds, TIPS and ETFs); MMI Letter
(convertible bonds, fixed income securities, preferred securities);
Comment Letter of Professional Compliance Assistance, Inc. (Aug. 11,
2015) (``PCA Letter'') (balanced mutual funds). See also IAA Letter
(U.S. government agency, corporate bonds, other).
\22\ Dechert Letter; IAA Letter.
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Some commenters expressed concerns about the proposed reporting of
``Corporate Bonds--Investment Grade'' and ``Corporate Bonds--Non-
Investment Grade,'' based on the proposed definitions of such terms, as
they believed that this would require advisers to make subjective
decisions about how to classify assets and could result in inconsistent
reporting. These commenters requested that the Commission eliminate the
reporting requirement, or either provide a more objective definition or
permit an adviser to follow and rely on the classifications made by
another investment adviser.\23\ Another commenter noted the reference
to ``liquidity'' in the definition and requested that the Commission
seek a consistent approach to liquidity-related concepts across
reporting regimes.\24\
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\23\ LPL Letter; MMI Letter.
\24\ IAA Letter.
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In response to these comments, we are removing the proposed
definitions of these terms from Form ADV. Given the instruction we have
added permitting advisers to use their own consistently applied
methodologies to select asset categories, we believe that the
definitions are no longer necessary. We recognize that an adviser might
reasonably categorize the same or similar assets differently from
another adviser. Even with such differences, we believe that this
categorization will provide useful information, particularly given the
Commission's intended purpose for requiring such reporting, which is to
better understand how assets in separately managed accounts are
invested across that industry, rather than to impose a standard of
creditworthiness for such assets.
Other commenters suggested we provide instructions as to whether
advisers need to look through investments in funds or ETFs, for
example, and report the underlying asset type.\25\ With respect to
looking through an account's investments in funds, advisers should not
do so and we have clarified this in the form.\26\ Advisers should not
look through investments in funds because we want to understand the
extent to which separately managed account assets are invested in funds
as well as other types of investments.
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\25\ ASG Letter; MMI Letter; NRS Letter; Schwab & Co. Letter.
\26\ We have added the following sentence to the text preceding
Schedule D, Section 5.K.(1)(a): ``Investments in derivatives,
registered investment companies, business development companies, and
pooled investment vehicles should be reported in those categories.
Do not report those investments based on related or underlying
portfolio assets.''
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c. Section 5.K.(2) of Schedule D
We are also adopting amendments to add Section 5.K.(2) of Schedule
D to Form ADV to require advisers to separately managed accounts to
report information regarding the use of borrowings and derivatives in
those accounts with modifications from the proposal in response to
commenters. These amendments are designed to provide data to assist our
staff in identifying and monitoring the use of borrowings and
derivatives exposures in separately managed accounts as part of the
staff's risk assessment and monitoring programs. Some commenters
supported our proposal for the collection of that data.\27\ However, as
discussed below, several other commenters expressed concern about the
proposed reporting thresholds, the public disclosure of certain
information,\28\ the use of gross notional metrics and the burden
associated with reporting this information. The specific gross notional
metrics used in Section 5.K.(2) are ``gross notional value'' and
``gross notional exposure,'' as proposed. The calculation of gross
notional exposure includes borrowings and the gross notional value of
derivatives. The definition of ``gross notional value'' specifies how
derivatives are measured when determining an account's gross notional
exposure.\29\
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\27\ NASAA Letter; SRC Letter.
\28\ We discuss public disclosure of separately managed account
information in Section II.A.1.e.
\29\ Gross notional exposure of an account is ``the percentage
obtained by dividing (i) the sum of (a) the dollar amount of any
borrowings and (b) the gross notional value of all derivatives, by
(ii) the regulatory assets under management of the account.''
Amended Form ADV, Part 1A, Schedule D, Item 5.K.(2). Gross notional
value is defined in the Glossary to Form ADV as ``The gross nominal
or notional value of all transactions that have been entered into
but not yet settled as of the reporting date. For contracts with
variable nominal or notional principal amounts, the basis for
reporting is the nominal or notional principal amounts as of the
reporting date. For options, use delta adjusted notional value.''
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One commenter suggested requiring reporting on derivatives only if
there is a minimum gross notional amount of derivatives.\30\ Another
commenter suggested as an alternative requiring derivatives reporting
only if the adviser uses leverage as part of its investment
strategy.\31\ We disagree with these approaches as they would give us
information only about a segment of the separately managed account
industry that uses derivatives or borrowings, and because the line
between advisers that use derivatives and borrowings strategically and
those that do not can be fluid and difficult to define. While we are
adopting Section 5.K.(2) largely as proposed, we have modified it in
certain places in response to commenters' concerns, as discussed below.
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\30\ Anonymous Letter.
\31\ JAG Letter.
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As proposed, advisers with at least $150 million but less than $10
billion in regulatory assets under management attributable to
separately managed accounts would have been required to annually report
in Section 5.K.(2)(b) the number of accounts and average borrowings
that corresponded to ranges of net asset values and gross notional
exposures, as of the date the adviser used to calculate its regulatory
assets under management for purposes of the adviser's annual updating
amendment. Advisers with at least $10 billion in regulatory assets
under management attributable to separately managed accounts would have
been required to annually report in Section 5.K.(2)(a) the number of
accounts, average borrowings, and average derivatives exposures across
six categories of derivatives, based on the same ranges of net asset
values and gross notional exposures in Section 5.K.(2)(b), as of the
date used by the adviser to calculate its regulatory assets under
management for purposes of its annual updating amendment, and six
months before that date.
We received a diversity of views about whether the proposed
reporting thresholds of at least $150 million in regulatory assets
under management attributable to separately managed
[[Page 60422]]
accounts, and at least $10 billion in regulatory assets under
management attributable to separately managed accounts for additional
reporting, were appropriate, and if not, what these thresholds should
be.\32\ Certain commenters suggested thresholds based on number of
accounts or the size of individual separately managed accounts.
However, we believe establishing thresholds based on regulatory assets
under management attributable to separately managed accounts better
provides us with comparability across advisers and appropriately
advances our regulatory goal of gaining a more complete understanding
of advisers' separately managed account business as compared to the
alternatives suggested by commenters. Several commenters recommended
that we increase the $150 million threshold to $500 million on the
basis that such a change would allow the Commission to collect 95% of
the data that it would using the $150 million threshold, while
relieving approximately 3,000 advisers from having to report
derivatives and borrowings information.\33\ On balance, and based on
our staff's experience with small advisers, we agree with commenters
that this is a sensible accommodation that would allow us to meet our
regulatory objectives while alleviating reporting burdens on smaller
advisers. As a result, we have raised the minimum reporting threshold
to $500 million. Advisers with at least $500 million but less than $10
billion in separately managed account regulatory assets under
management will be required to report on Section 5.K.(2)(b) the amount
of separately managed account regulatory assets under management and
the dollar amount (rather than the proposed average amount) of
borrowings attributable to those assets that correspond to three levels
of gross notional exposures rather than four levels as proposed.
Advisers with at least $10 billion in separately managed account
regulatory assets under management will be required to report on
Section 5.K.(2)(a) the information required in Section 5.K.(2)(b) as
well as the derivative exposures across the same six derivatives
categories that were proposed. Also as proposed, advisers may limit
their reporting for both (a) and (b) to individual accounts of at least
$10 million.\34\
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\32\ ASG agreed with the $150 million threshold. Oppenheimer
agreed with the thresholds, but also suggested a threshold based on
number of accounts, below which the adviser would not be required to
respond to Section 5.K.(2), and permitting advisers to round number
of accounts to the nearest five in a particular range. IAA
recommended increasing the $150 million threshold to $500 million
but supported the $10 billion threshold. SIFMA also agreed with the
thresholds, but suggested changing the account-level reporting
thresholds to minimize confidentiality concerns and permitting
advisers to round to the nearest 5 accounts in a particular range.
AIMA noted that the proposed thresholds at the adviser level and at
the individual separately managed account level are low for advisers
with institutional clients and recommended not requiring advisers
with less than $150 million in separately managed account assets to
report any separately managed account information, including in
Sections 5.K.(1) and 5.K.(3). Anonymous suggested that the reporting
threshold should be based on a minimum gross notional amount in
relation to the adviser's total regulatory assets under management.
BlackRock suggested that reporting thresholds should not be tied to
aggregate adviser separately managed account regulatory assets under
management, but rather only to individual separately managed account
regulatory assets under management.
\33\ IAA Letter; Comment Letter of the New York State Bar
Association, Business Law Section, Securities Regulation Committee,
Private Investment Funds Subcommittee (Aug. 12, 2015) (``NYSBA
Committee Letter''); PCA Letter; Schwab & Co. Letter. IAA estimated
that if the minimum threshold were $150 million, the Commission
would collect data on approximately $37.8 trillion in separately
managed account assets under management from 7,257 advisers.
However, it estimated that if the threshold were raised to $500
million, the Commission would collect data on approximately $36.8
trillion in separately managed account assets under management from
approximately 3,700 advisers. A recent analysis of Form ADV by
Commission staff filings shows that over 2,800 advisers will be
relieved from the filing requirement and we will receive information
on 98% of the assets for which we would have received reporting
under the proposed $150 million threshold. IARD system data as of
May 16, 2016.
\34\ Some commenters suggested making the exclusion of
individual accounts under $10 million optional because excluding
those accounts might, in some cases, be more costly to firms. See
Dechert Letter; IAA Letter; NYSBA Committee Letter. We have revised
the text in Section 5.K.(2) to read, ``You may, but are not required
to, complete the table with respect to any separately managed
account with regulatory assets under management of less than
$10,000,000.''
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Another change we are making to Section 5.K.(2) in response to
commenters is to base the reporting of borrowings and derivatives on
regulatory assets under management in separately managed accounts,
rather than net asset value as proposed. One commenter noted that
advisers do not currently characterize their individual client accounts
according to net asset values.\35\ We agree, and accordingly advisers
will be required to report both the amount of regulatory assets under
management and borrowings in their separately managed accounts that
correspond to ranges of gross notional exposure of those accounts.
Regulatory assets under management is already used throughout Form ADV,
and should be available to advisers for purposes of Section 5.K.(2).
Similarly, the reporting of borrowings in Section 5.K.(2) has been
revised to require information about the total dollar amount of
borrowings that correspond to different ranges of gross notional
exposure, and not the weighted average amount (which is based on a
percentage of net asset value).\36\ We believe these changes will
reduce burdens for advisers completing this section, while providing
our staff with additional information regarding borrowings and
derivatives exposures in separately managed accounts.
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\35\ IAA Letter.
\36\ One commenter suggested that reporting of borrowing is
duplicative of reporting of margin by broker-dealer custodians to
FINRA. JAG Letter. While we recognize that broker-dealers report
this information, we note that parties other than broker-dealers may
serve as custodians to separately managed accounts.
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Commenters presented a range of concerns and suggestions about the
use of gross notional metrics in reporting on Section 5.K.(2). Some
commenters supported the use of gross notional metrics for assessing
the use of derivatives and borrowings in separately managed
accounts,\37\ while others raised issues concerning the utility of
gross notional metrics.\38\ Several commenters stated that gross
notional metrics are not accurate measures of leverage or risk and
argued that they provide little value without context, and they could
be misleading or misunderstood.\39\ Some commenters suggested reporting
derivatives and borrowings in Form ADV similar to how leverage is
reported in Form PF or in the AIFMD framework.\40\ For example, one
[[Page 60423]]
commenter suggested reporting long and short dollar amounts, similar to
Form PF.\41\ We acknowledge these commenters' concerns and recognize
that gross notional metrics may not always reflect the way in which
derivatives are used in a separately managed account and are not a risk
measure.\42\ We also recognize that there are other measures or
additional data points that could be used to evaluate the use of
derivatives in a separately managed account, which may depend on
various considerations, such as investment strategy, types of
investments, and the specific risks that are being considered. The
calculations of gross notional exposure and gross notional value that
we proposed and are adopting today rely on measures common to all
advisers: regulatory assets under management of an account; total
amount of borrowings in an account; and the notional value of
derivatives. As we noted in the Proposing Release, gross notional
metrics are commonly used metrics and are comparable to the information
collected on Form PF regarding private funds. On balance, therefore, we
continue to believe that, for most types of derivatives the gross
notional metrics generally provide a measure that is sufficient for
this regulatory purpose, which is to collect information about the
scale of an account's derivatives activities, rather than to collect
specific risk metrics or more granular information regarding the ways
in which derivatives are used in a separate account. Section 5.K.(2)
also provides advisers the option of including a narrative description
of the strategies and/or manner in which borrowings and derivatives are
used in the management of separately managed accounts. To the extent
that advisers are concerned that disclosure of gross notional metrics
would be misleading, they could provide in the space provided in
Section 5.K.(2) an additional narrative description regarding their use
of derivatives in these accounts.
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\37\ Comment Letter of CFA Institute (Aug. 10, 2015) (``CFA
Letter'') (observing that notional exposure metrics are valuable in
conducting investment and operational analyses, but provide less
value for risk management); NASAA Letter (stating that the proposal
contemplates collecting commonly used metrics on the use of
derivatives and borrowings, consistent with Form PF); and SRC Letter
(suggesting that the collection of data relating to gross notional
exposure, borrowings and gross notional value of derivatives would
provide the Commission with ``invaluable insight into the use of
derivatives and borrowings by advisers in separately managed
accounts.'').
\38\ See, e.g. NYSBA Committee Letter (stating that publicly
reporting gross notional exposures without also reflecting actual
exposure on the form would be misleading and potentially alarming to
investors) and MFA Letter (asserting that gross notional disclosures
provide an inaccurate representation of economic or market exposures
and would not provide meaningful information, and thus should not be
required).
\39\ BlackRock Letter; Dechert Letter; IAA Letter; Invesco
Letter.
\40\ Dechert Letter (suggesting allowing additional data points,
such as the ones required in Form PF, to better provide the
Commission a more comprehensive understanding of the extent to which
derivatives are used in separately managed accounts and the relevant
risks associated with them); Blackrock Letter (providing an appendix
containing a comprehensive framework for calculating leverage,
similar to AIFMD's commitment leverage approach, under which
derivatives used for hedging positions and offsetting long and short
positions do not create leverage).
\41\ AIMA Letter.
\42\ For example, different derivatives transactions having the
same notional amount but different underlying reference assets--for
example, an interest rate swap and a credit default swap having the
same notional amount--may expose a separately managed account to
very different potential investment risks and potential payment
obligations.
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Many commenters requested that the term ``derivatives'' be defined
as part of this rulemaking.\43\ Several of these commenters suggested
the Commission adopt a definition that provides flexibility to adapt to
changing financial markets and instruments, such as the characteristic-
based definition of derivatives in FASB ASC 815.\44\ Another commenter,
however, suggested that we should not define derivatives, similar to
Form PF.\45\ We believe that Form ADV, which collects aggregate
portfolio information, is similar to Form PF. Thus, consistent with
adviser reporting on Form PF and the proposal, we have decided not to
define the term at this time. Several commenters requested
clarification on whether interest rate derivatives should be presented
in terms of 10-year bond equivalents, consistent with Form PF.\46\ We
have added a sentence to the definition of ``interest rate derivative''
in the Glossary that interest rate derivative information should be
presented in terms of 10-year bond equivalents. Regarding the term
``equity derivative,'' one commenter requested confirmation that the
term ``listed'' as used in Form ADV has the same meaning as in Form PF.
We confirm that the term ``listed equity derivatives'' refers to
exposures to derivatives for which the underlying asset is listed
equities.\47\
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\43\ ASG Letter; Oppenheimer Letter; PCA Letter; SIFMA Letter;
T. Rowe Price Letter.
\44\ Oppenheimer Letter; SIFMA Letter; T. Rowe Price Letter.
\45\ IAA Letter.
\46\ AIMA Letter; IAA Letter; MFA Letter.
\47\ We note that current staff guidance regarding this term in
Form PF takes a similar approach. See Form PF, Frequently Asked
Questions, Question 26.1.
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Finally, we are also revising the proposal in ways that should both
alleviate concerns about confidentiality, which we discuss more fully
below, and simplify reporting of separately managed account
information. First, we reduced the number of categories of gross
notional exposure that we proposed in the charts. As proposed, Section
5.K.(2) included four categories of gross notional exposure by which
accounts and borrowings were reported. This has been reduced to three
categories of gross notional exposure: less than 10%, 10--149% and 150%
or more. In addition to reducing the number of categories from four to
three, we changed the highest threshold from 200% or more to 150% or
more. After consideration of comments received regarding the potential
burdens of providing this information, we believe that the use of three
categories instead of four and changing the highest threshold from 200%
or more to 150% or more will reduce the reporting burden on advisers
while providing us with sufficient information regarding the use of
derivatives and borrowings by investment advisers in separately managed
accounts. In addition, we believe that these modifications provide less
granular information than proposed, thereby mitigating some concerns
commenters raised regarding confidentiality. We also modified Section
5.K.(2) to remove reporting of the number of separately managed
accounts. As proposed, Section 5.K.(2) would have required advisers to
report the number of accounts that corresponded to the accounts' net
asset value and gross notional exposure. Section 5.K.(2)(a) and (b) now
require reporting of regulatory assets under management based on ranges
of gross notional exposure of accounts.\48\
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\48\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).
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d. Section 5.K.(3) of Schedule D
As proposed, we are amending Form ADV to require advisers to
identify any custodians that account for at least ten percent of
separately managed account regulatory assets under management, and the
amount of the adviser's regulatory assets under management attributable
to separately managed accounts held at the custodian.\49\ This
information will allow our examination staff to identify advisers whose
clients use the same custodian in the event, for example, a concern is
raised about a particular custodian. As we discussed in the Proposing
Release, similar disclosures are required for custodians to pooled
investment vehicles \50\ and registered investment companies.\51\
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\49\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(3). We
added ``aggregate'' before ``separately managed account regulatory
assets under management'' to the text preceding the section for
clarity.
\50\ Amended Form ADV, Part 1A, Schedule D, Section 7.B.(1),
Question 25.
\51\ Form N-1A, Item 19(h)(3).
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We received several comments on this aspect of the proposal. For
example, a commenter suggested that we obtain this information from
other parties, including custodians.\52\ However, we do not directly
regulate all separately managed account custodians and we believe this
information is available to advisers because advisers interact with
custodians when placing trades on behalf of separately managed account
clients. Some commenters agreed with the ten percent of regulatory
assets under management threshold for reporting custodians of the
adviser's separately managed account client
[[Page 60424]]
assets.\53\ Other commenters recommended that the Commission modify the
threshold, and raised concerns about this reporting for smaller
advisers.\54\ We agree with the commenters who believe that the ten
percent threshold is appropriate. We recognize that this reporting will
impose some burdens on all advisers, including smaller advisers.
However, we are adopting the ten percent threshold as proposed because
we continue to believe it, rather than a higher threshold, most
appropriately advances our regulatory goal of identifying and obtaining
a more complete picture regarding the custodians serving a significant
proportion of an adviser's separately managed account clients.
Moreover, we believe we have appropriately tailored and limited the
scope of information to be reported since this requirement at most will
require advisers to identify ten custodians.
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\52\ BlackRock Letter. See also Comment Letter of Financial
Engines Advisors, LLC (Aug. 11, 2015) (``Financial Engines Letter'')
(suggesting identification of recordkeeper, rather than custodian,
where advised assets are associated with a 401(k) plan).
\53\ Anonymous Letter; CFA Letter; PCA Letter.
\54\ AIMA Letter (suggested a twenty percent threshold);
BlackRock Letter; IAA Letter; MMI Letter; NRS Letter (suggested a
minimum separately managed account regulatory assets under
management threshold in lieu of or in addition to the ten percent
threshold).
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In addition, some commenters recommended deleting or clarifying the
requirement to identify the location of the custodian's office.\55\
These commenters reasoned that because of the electronic nature of
custodian records, and the current advisers' practice of not
maintaining this physical location information as a matter of course,
disclosure of the identity of the custodian, rather than the location
of the office, would be of primary benefit to the Commission. This
information is consistent with similar questions we ask about
custodians in Schedule D, Section 7.B.(1), Question 25 of Form ADV.
Location information allows us to identify the appropriate contacts
when a custodian is part of a large organization with multiple
offices.\56\ Therefore, we are adopting these requirements as proposed.
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\55\ ASG Letter; IAA Letter; MMI Letter; Oppenheimer Letter; PCA
Letter; SIFMA Letter.
\56\ One commenter also sought clarification about reporting
custodians who have multiple legal entities. IAA Letter. Advisers do
not have to determine affiliations of related custodians for
purposes of this item, but rather should report the particular legal
entity that is custodian for the adviser's separately managed
account assets.
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e. Public Disclosure of Separately Managed Account Information
While commenters understood our reasons for collecting information
on separately managed accounts, many expressed concerns that the new
reporting would lead to disclosure of client-identifying information or
confidential or proprietary information about investment strategy.\57\
Commenters also expressed concern that public disclosure of separately
managed account information could put advisers with a small number of
separately managed account clients at a competitive disadvantage if
clients were concerned about the reporting on Form ADV being linked or
attributable to their separately managed accounts.\58\ We address these
concerns below.
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\57\ Comment Letter of the American Bar Association, Section of
Business Law, Federal Regulation of Securities Committee (Sept. 3,
2015) (``ABA Committee Letter''); AIMA Letter; Anonymous Letter; ASG
Letter; BlackRock Letter; Dechert Letter; IAA Letter; Invesco
Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter;
Comment Letter of Schulte Roth & Zabel LLP (Aug. 11, 2015)
(``Schulte Letter''); Comment Letter of Shearman & Sterling LLP
(Aug. 11, 2015) (``Shearman Letter''); SIFMA Letter; Comment Letter
of Securities Industry and Financial Markets Association Asset
Management Group and Asset Managers Forum (Jan. 13, 2016) (``SIFMA
II Letter''). See also Comment Letter of Private Equity Growth
Capital Council (Aug. 11, 2015) (``PEGCC Letter'').
\58\ ABA Committee Letter; AIMA Letter; Anonymous Letter;
BlackRock Letter; Dechert Letter; IAA Letter; MFA Letter; NYSBA
Committee Letter; Oppenheimer Letter; Schulte Letter; Shearman
Letter; SIFMA Letter; SIFMA II Letter.
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Section 210(a) of the Advisers Act requires information in Form ADV
to be publicly disclosed, unless we find that public disclosure is
neither necessary nor appropriate in the public interest or for the
protection of investors.\59\ As discussed in the Proposing Release, we
believe these amendments will enhance our staff's risk assessment and
monitoring activities, which also serve to benefit investors.\60\ We
also believe that aggregate information about separately managed
accounts may assist the public in better understanding advisers'
management of separately managed account clients.\61\ This information
may directly improve the ability of clients and potential clients of
investment advisers to make more informed decisions about the selection
and retention of investment advisers, which, in turn, may also benefit
the public by increasing competition among investment advisers for
clients. For these reasons, we continue to believe that public
disclosure of information about separately managed accounts on Form ADV
is appropriate in the public interest as well as for the protection of
investors. We have, however, made several modifications to our
proposal, discussed below, in response to commenters.
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\59\ Advisers Act section 210(a). Certain commenters suggested
that this information be filed in a nonpublic manner, similar to
Form PF. See ABA Committee Letter; PEGCC Letter. We note that Form
PF is filed on a confidential basis under Advisers Act section
204(b), which prohibits the Commission from disclosing Form PF
information unless those disclosures are made to Congress, other
Federal agencies, or courts under certain conditions. Advisers Act
section 204(b)(8).
\60\ Proposing Release, supra footnote 3 at Section II.A.1.
\61\ C.f., NASAA Letter (``These amendments would provide
additional necessary information to the SEC and state regulators, as
well as members of the public, far outweighing any regulatory burden
the proposal creates.'').
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Some commenters also expressed broader concerns that public
disclosure of separately managed account holdings or borrowings and
derivatives information would reveal proprietary investment
strategies.\62\ We do not believe that public disclosure of aggregate
information in Schedule D, Sections 5.K.(1) or (2) would lead to the
revelation of proprietary investment strategies. This information would
be reported for one or two data points per year,\63\ depending on the
amount of regulatory assets under management attributable to separately
managed accounts, ninety days after the end of the adviser's fiscal
year,\64\ and only on an aggregate basis for all the separately managed
account clients that an adviser manages. Given the limited number of
data points that advisers to separately managed accounts must report
on, the fact that the information is reported both in aggregate and in
broad categories across an adviser's separately managed accounts, and
the time lag between those data points and any public reporting, we
disagree that this reporting could compromise trading
[[Page 60425]]
strategies. In addition, as discussed above, we reduced the number of
categories of gross notional exposures in Section 5.K.(2), which means
advisers will be required to report less granular information.\65\
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\62\ See, e.g., ABA Committee Letter (``While individual types
of securities would not be disclosed, the percentage of the
portfolio in ten different asset categories would be subject to
unprecedented public scrutiny, as would be detailed breakdowns of
derivatives exposures and borrowings.''); BlackRock Letter; Dechert
Letter; MFA Letter.
\63\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1) and
(2). Although two commenters recommended against larger advisers
providing both mid-year and end of year separately managed account
information, we believe this information is important to
understanding advisers to the largest separately managed accounts.
LPL Letter; NRS Letter.
\64\ Advisers are required to update the derivatives and
borrowings information annually, when filing their annual updating
amendment to Form ADV, which is consistent with the requirement for
updating other information in Item 5 of Form ADV. Advisers with at
least $10 billion in separately managed account regulatory assets
under management would be required to report both mid-year and end
of year information as part of their annual filing. Many commenters
supported the annual reporting and recommended against more frequent
reporting. Anonymous Letter; ASG Letter; CFA Letter; Comment Letter
of Capital Research and Management Company (Aug. 11, 2015)
(``Capital Research Letter''); MMI Letter; Morningstar Letter; NRS
Letter; PCA Letter; Shearman Letter. Form ADV is required to be
amended at least annually, within 90 days of the end of the
adviser's fiscal year. See rule 204-1.
\65\ Supra Section II.A.1.c.
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We are mindful of commenters' concerns regarding disclosure of
client-specific information and related competition concerns.\66\
Accordingly, we revised Item 5.D., which lists the number of advisory
clients in categories, to include a ``fewer than 5 clients''
column.\67\ We also have modified Section 5.K.(2) to remove reporting
of the number of accounts. As proposed, Section 5.K.(2) would have
required reporting of the number of accounts that correspond to the
accounts' net asset value and gross notional exposure. As adopted,
Section 5.K.(2)(a) and (b) will require reporting solely by ranges of
gross notional exposure of accounts.\68\ We believe that these changes
mitigate the risk of any client-specific information being disclosed in
Item 5.D. and Sections 5.K.(1) and (2).
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\66\ See, e.g., ABA Committee Letter; AIMA Letter; BlackRock
Letter (``For a particular adviser, there may be only one or two
accounts in a particular category, potentially making this client
identifiable and its RAUM with an adviser public information.'');
Dechert Letter; IAA Letter; MFA Letter (``[A] fund manager may need
to report data of a single SMA client, which is not suitable for
public disclosure.''); NYSBA Committee Letter (``In addition, if an
adviser has a small number of accounts, the disclosure of any of the
information would be particularly problematic as others may be in a
position to determine the identity of the clients in any such
account.''); Oppenheimer Letter; SIFMA Letter.
\67\ Several commenters suggested limiting reporting for five or
fewer clients, or rounding to the nearest five clients. IAA Letter;
NYSBA Committee Letter; Oppenheimer Letter; SIFMA Letter. Other
commenters suggested that advisers with a small number of separately
managed account clients be excluded from reporting on separately
managed accounts. See, e.g., AIMA Letter; SIFMA Letter. However, a
small number of accounts could still include a large amount of
assets or significant use of borrowings and derivatives. For that
reason, reporting will be required on these accounts. We believe
that the modifications in Item 5.D. and Schedule D, Section 5.K.(2)
will address confidentiality concerns related to those accounts.
\68\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).
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f. Additional Comments About Reporting of Separately Managed Accounts
Additional comments regarding separately managed account reporting
in Schedule D included comments about the definition of separately
managed account, the treatment of subadvisers, and the reporting
requirements when both the registered investment adviser and the
separately managed account owner are not United States persons.
First, several commenters sought clarification of the definition of
the term ``separately managed account'' as used in Form ADV.\69\ We do
not believe that a formal definition of this term is required because
we have included instructions in the text preceding Sections 5.K.(1)
and (2) to clarify that any regulatory assets under management reported
in Item 5.D.(3)(d) (investment companies), (e) (business development
companies), and (f) (other pooled investment vehicles) should not be
reported in Schedule D, Sections 5.K.(1) or (2). Thus, regulatory
assets under management reported for those types of clients in Item
5.D.(3) should not be considered separately managed account assets and
should not be reported in Sections 5.K.(1) or (2).
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\69\ See, e.g., IAA Letter (noting the term has not been defined
in the Advisers Act); Financial Engines Letter (seeking the
exclusion of assets within defined contribution plans from
separately managed accounts); MMI Letter (seeking clarification for
sponsors, overlay managers, portfolio managers and model providers).
Commenters also sought clarification of the treatment of pooled
investment vehicles that are not private funds. See PEGCC Letter.
See also IAA Letter. Pooled investment vehicles include, but are not
limited to, private funds.
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Second, several commenters requested clarification about how to
treat subadviser relationships in reporting separately managed account
information, including suggestions that only advisers with
discretionary authority report information in these sections.\70\ In
response to these concerns, we are clarifying the instructions in the
text preceding Section 5.K.(1)(a) to expressly state, as they already
do for Section 5.K.(2), that a subadviser to a separately managed
account should provide information only about the portion of the
account that it subadvises.\71\ We recognize that these instructions
may require both advisers and subadvisers to report on the same
regulatory assets under management (i.e., the assets that they both
manage in an account) in Sections 5.K.(1) and (2) of their separate
Form ADVs, which is consistent with the current reporting structure of
regulatory assets under management in Form ADV.
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\70\ Comment Letter of JG Advisory Services LLC (Jul. 22, 2015)
(``JGAS Letter''); LPL Letter; MMI Letter; NYSBA Committee Letter;
SIFMA Letter. See also Dechert Letter; IAA Letter.
\71\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1) and
(2).
---------------------------------------------------------------------------
Further, in response to suggestions that only advisers with
discretionary authority should be required to report information in
Sections 5.K.(1) and (2), we note that these sections both require
responses based on the regulatory assets under management an adviser
reports in Item 5.F. Per the instructions to Item 5.F., advisers are
already required to consider the role of discretionary authority when
calculating regulatory assets under management. Those instructions
require that the calculation include only assets over which advisers
provide continuous and regular supervisory or management service.\72\
The instructions further state that an adviser ``provide[s] continuous
and regular supervisory or management services with respect to an
account'' if: (a) The adviser has discretionary authority over and
provides ongoing supervisory or management services with respect to the
account; or (b) the adviser does not have discretionary authority over
the account, but has ongoing responsibility to select or make
recommendations, based upon the needs of the client, as to specific
securities or other investments the account may purchase or sell and,
if such recommendations are accepted by the client, the adviser is
responsible for arranging or effecting the purchase or sale.\73\ Thus,
if an adviser does not provide continuous and regular supervisory or
management services with respect to an account, those account's assets
should not be reported as regulatory assets under management in Item
5.F, and would not be reported in Sections 5.K.(1) and (2).
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\72\ See Form ADV, Instructions to Part 1A, Item 5.F.
\73\ Id.
---------------------------------------------------------------------------
A final suggestion from commenters was to exclude from the
reporting requirements any separately managed account held by a non-
United States person and managed by an investment adviser whose
principal office and place of business is outside the United
States.\74\ As proposed, and consistent with the reporting of
regulatory assets under management generally, we are requiring each
adviser whose principal office and place of business is outside the
United States to report information regarding separately managed
accounts for all of their clients, including clients who are not United
States persons.\75\ We believe that the consistent reporting of
information in Item 5 will be valuable in our and the public's
understanding of the new separately managed account items as they are a
subset of the regulatory assets under management
[[Page 60426]]
already being reported by registered investment advisers.
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\74\ AIMA Letter; PEGCC Letter; Shearman Letter. ``United States
person'' is defined in the Glossary to Form ADV.
\75\ The Form ADV Instructions to Part 1A, Item 5 that specify
how regulatory assets under management must be calculated provides
that accounts of clients who are not United States persons are
accounts that must be included in the adviser's securities
portfolios.
---------------------------------------------------------------------------
Commenters suggested that we not require reporting of accounts
beneficially owned by those who are not United States persons and
managed by advisers whose principal offices and places of business are
outside the United States. These commenters noted Item 7.B. of Form ADV
and Form PF generally allow advisers whose principal offices and places
of business are outside the United States to exclude reporting on funds
that are not United States persons, are not offered in the United
States, and are not beneficially owned by any United States
persons.\76\ As noted above, there is not a similar exclusion in Item 5
regarding funds that are not United States persons advised by any
advisers, and advisers must include those clients in response to Item
5, including their regulatory assets under management and client types.
An exception like the one suggested by commenters would hamper the
utility of the data collection in Item 5, which collects aggregate,
census-type information regarding the adviser's total business. We are
collecting this information to better inform Commission staff and the
public about this segment of the investment adviser industry.\77\
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\76\ AIMA Letter; PEGCC Letter; Shearman Letter.
\77\ See infra Section II.A.3 for a discussion of the
application of the Advisers Act to non-U.S. advisers.
---------------------------------------------------------------------------
In the Proposing Release, we requested comment on whether to
require advisers to report on securities lending and repurchase
agreements in separately managed accounts.\78\ While some commenters
supported collection of this information,\79\ others noted that
advisers may not be aware of or directly involved in securities lending
activity in separately managed accounts,\80\ and several commenters
objected to the disclosure.\81\ In response to the comments we
received, we are not requiring disclosure regarding securities lending
or repurchase agreements at this time.
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\78\ Proposing Release, supra footnote 3 at Section II.A.1.
\79\ CFA Letter; SRC Letter.
\80\ JAG Letter; NRS Letter; Comment Letter of The Risk
Management Association, Committee on Securities Lending (Aug. 10,
2015) (``RMA Committee Letter''); Comment Letter of State Street
Corporation (Aug. 11, 2015) (``State Street Letter'').
\81\ MFA Letter: PCA Letter. See also ASG Letter.
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2. Additional Information Regarding Investment Advisers
In addition to the amendments outlined above regarding separately
managed accounts, we are adopting, largely as proposed, several new
questions and amending existing questions on Form ADV regarding
identifying information, an adviser's advisory business, and
affiliations. As discussed in the Proposing Release, these items were
developed through our staff's experience in examining and monitoring
investment advisers, and are designed to enhance our understanding and
oversight of investment advisers and to assist our staff in its risk-
based examination program.
a. Additional Identifying Information
We are adopting several amendments to Item 1 of Part 1A of Form ADV
as proposed to improve certain identifying information that we obtain
about advisers. Item 1 currently requires an adviser to provide a
Central Index Key number (``CIK Number'') in Item 1.N. only if the
adviser is a public reporting company under Sections 12 or 15(d) of the
Securities Exchange Act of 1934.\82\ We are removing this question from
Item 1.N. and adding a question to Item 1.D. that requires an adviser
to provide all of its CIK Numbers if it has one or more such numbers
assigned,\83\ regardless of public reporting company status.\84\ As we
explained in the Proposing Release, requiring registrants to provide
all of their assigned CIK Numbers, if any, will improve our staff's
ability to use and coordinate Form ADV information with information
from other sources.\85\ The commenter who weighed in on the reporting
of CIK Numbers did not object to this amendment, which we are adopting
as proposed.
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\82\ Form ADV, Part 1A, Item 1.N.
\83\ The SEC assigns CIK Numbers in EDGAR not only to identify
entities as public reporting companies, but also when an entity is
registered with the SEC in certain other capacities, such as a
transfer agent.
\84\ Amended Form ADV, Part 1A, Item 1.D.(3).
\85\ Proposing Release, supra footnote 3 at Section II.A.2.
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Item 1.I. of Part 1A of Form ADV currently asks whether an adviser
has one or more Web sites, and Section 1.I. of Schedule D requests the
addresses of each Web site. We are amending Item 1.I. largely as
proposed to also ask whether the adviser has one or more accounts on
social media platforms, such as Twitter, Facebook or LinkedIn, and
requesting the address of each of the adviser's social media pages in
addition to the address of each of the adviser's Web sites in Section
1.I. of Schedule D.\86\ As discussed in the Proposing Release, our
staff may use this information to help prepare for examinations of
investment advisers and compare information that advisers disseminate
across different social media platforms, as well as to identify and
monitor new platforms. Current and prospective clients may use this
information to learn more about advisers and make more informed
decisions regarding the selection of advisers.\87\
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\86\ Amended Form ADV, Part 1A, Item 1.I. and Section 1.I. of
Schedule D.
\87\ Proposing Release, supra footnote 3 at Section II.A.2.
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Several commenters were generally supportive of our proposed
approach to social media reporting,\88\ but some commenters were
concerned that it would be too burdensome for advisers and not useful
to investors.\89\ Several commenters requested clarification on the
types of social media platforms that trigger the reporting
requirement,\90\ and some commenters recommended that we limit required
reporting to accounts on social media platforms where the adviser
controls the content.\91\ These commenters pointed out that there may
be social media platforms that reference an adviser over which the
adviser has no control and of which the adviser may not even be
aware.\92\ We agree, and we have revised Item 1.I. of Part 1A and
Section 1.I. of Schedule D to note that the required reporting is
limited to accounts on social media platforms where the adviser
controls the content.\93\ Commenters generally agreed with the
proposal's approach of not requiring information about the social media
accounts of an adviser's employees.\94\
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\88\ CFA Letter; IAA Letter; LPL Letter; Morningstar Letter;
NASAA Letter. See also BlackRock Letter (understood our rationale
for requesting this information).
\89\ Comment Letter of TMorgan Advisers, LLC (June 28, 2015)
(``Morgan Letter''); NRS Letter; NYSBA Committee Letter; Oppenheimer
Letter.
\90\ ASG Letter; IAA Letter; MMI Letter; SIFMA Letter.
\91\ ASG Letter; MMI Letter; SIFMA Letter.
\92\ MMI Letter. See also ASG Letter.
\93\ An adviser may control its social media content,
notwithstanding the fact that a social media platform has a policy
to edit or remove content (such as offensive content) across the
platform.
\94\ ASG Letter; MFA Letter; MMI Letter; Morgan Letter;
Morningstar Letter; NRS Letter; NYSBA Committee Letter.
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A commenter requested that we limit required reporting to accounts
on public-facing social media platforms used to promote the adviser's
business.\95\ We did not intend to require reporting on information
posted on an adviser's internal social media platform or information
not intended to promote the adviser's business to potential clients
(e.g., information posted on a job board intended to attract job
applicants). We have revised the text preceding Item 1.I. of Part 1A
and Section 1.I. of
[[Page 60427]]
Schedule D to clarify that the required reporting is limited to
accounts on publicly available social media platforms.
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\95\ IAA Letter.
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Another commenter requested that we limit required reporting to
accounts on social media platforms that promote the adviser's business
in the United States or are targeted towards the adviser's U.S.
clients.\96\ The commenter pointed out that there are circumstances in
which an adviser might have additional accounts on social media
platforms that are not used to promote the adviser's business in the
United States or are targeted towards the adviser's non-U.S. clients
and that reporting on such accounts would provide little value to the
Commission and could be confusing to clients or potential clients
seeking information about an adviser.\97\ We believe that, to the
extent an account on a social media platform is used to promote the
business of an adviser registered with the Commission, the account
should be disclosed in order to better inform our staff about the
adviser's use of social media. However, if an account on a social media
platform is used solely to promote the business of an affiliate or
affiliates that are not advisers registered with the Commission, the
account does not need to be disclosed on Form ADV.
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\96\ SIFMA Letter.
\97\ Id. The commenter also mentioned that a large advisory
complex that includes multiple affiliated advisers may maintain an
account on a social media platform on behalf of a parent company or
another affiliate that is not designed to promote the reporting
adviser's services and/or is targeted towards non-U.S. clients,
perhaps in a language other than English.
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A few commenters were concerned that the burden on advisers of
updating social media information on Form ADV promptly if the
information becomes inaccurate in any way would be great, given the
frequency of changes in social media platforms and accounts.\98\ We
believe that, by limiting the social media information required on Form
ADV to an adviser's accounts on publicly available social media
platforms where the adviser controls the content, the burden associated
with reporting and updating that information should be limited. Because
the social media environment is rapidly evolving, we think it will be
useful to the Commission and investors to have current information on
an adviser's use of social media on Form ADV. Additionally, this
approach to updating social media reporting is consistent with our
current approach to updating the other information required in Item 1
of Part 1A, including information on advisers' Web sites.
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\98\ BlackRock Letter; Oppenheimer Letter; SIFMA Letter.
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Several commenters questioned the utility for investors of social
media reporting in Part 1A of Form ADV.\99\ Commenters stated that
investors who are interested in an adviser's social media presence will
most likely look to the adviser's Web site or conduct an internet
search to find the adviser's accounts on various social media
platforms.\100\ We recognize that this is most likely the case.
However, we believe that having current information on an adviser's
social media presence collected in one place on Form ADV may be helpful
to investors. Two commenters stated that investors generally do not
read Part 1A of Form ADV and recommended that we consider including
social media reporting in Part 2A of Form ADV instead.\101\ We
recognize that investors may not look to Form ADV for information on an
adviser's social media presence, but if they do, they will likely look
to Item 1.I. of Part 1A and Section 1.I. of Schedule D because those
are where we currently collect identifying information about an
adviser, including information on an adviser's Web site or Web sites.
In addition, a primary purpose of this item is to provide the
Commission and our staff with information that may be used in our
examination program and for other regulatory purposes. Accordingly, we
believe it will be useful to the Commission to have information on an
adviser's use of social media on Form ADV, and this placement in the
form is an efficient and readily identifiable location for such
information that appropriately serves our regulatory purposes.
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\99\ Comment Letter of the Association for Corporate Growth
(Aug. 11, 2015) (``ACG Letter''); ASG Letter; JAG Letter;
Morningstar Letter; PCA Letter.
\100\ ASG Letter; JAG Letter; Morningstar Letter; Oppenheimer
Letter; PCA Letter.
\101\ Morningstar Letter; PCA Letter. See also Comment Letter of
Jeff J. Diercks (May 22, 2015) (``Diercks Letter'').
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We are amending Item 1.F. of Part 1A of Form ADV and Section 1.F.
of Schedule D largely as proposed to expand the information provided
about an adviser's offices other than its principal office and place of
business. We currently require an adviser to provide contact and other
information about its principal office and place of business, and, if
an adviser conducts advisory activities from more than one location,
about its largest five offices in terms of number of employees.\102\ In
order to help Commission examination staff learn more about an
investment adviser's business and identify locations to conduct
examinations, we are now requiring that advisers provide us with the
total number of offices at which they conduct investment advisory
business and provide information in Schedule D about their 25 largest
offices in terms of number of employees.\103\ As discussed in the
Proposing Release, we chose 25 offices as the number to be reported
because it will provide a complete listing of offices for the vast
majority of investment advisers, and provide valuable information about
the main business locations for the few advisers that have a very large
number of offices.\104\
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\102\ Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule
D.
\103\ Amended Form ADV, Part 1A, Item 1.F. and Section 1.F. of
Schedule D.
\104\ See Proposing Release, supra footnote 3 at Section II.A.2.
IAPD Investment Adviser Registered Representative State Data as of
May 2, 2016 shows that a majority of SEC-registered advisers
(approximately 98%) have 25 or fewer offices, but that many of the
remaining two percent have many multiples of 25 offices.
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In addition to providing contact information for the 25 largest
offices in terms of number of employees, we are amending Section 1.F.
of Schedule D as proposed to require advisers to report each office's
CRD branch number (if applicable) and the number of employees who
perform advisory functions from each office, identify from a list of
securities-related activities the business activities conducted from
each office, and describe any other investment-related business
conducted from each office. This information will help our staff assess
risk, because it provides a better understanding of an investment
adviser's operations and the nature of activities conducted in its top
25 offices. This information also will assist our staff in assessing
offices that conduct a combination of activities.
Two commenters provided general support for our proposed enhanced
reporting of adviser offices.\105\ However, several commenters
expressed concern that our approach would impose a significant burden
on advisers with little or no benefit to either the Commission or
investors.\106\ Another commenter noted the substantial burden on
advisers required to report additional offices, but acknowledged that
burden would ease after the initial reporting period.\107\ We recognize
that the burden on some large advisers might be significant, especially
in the initial reporting cycle when they are required to report their
additional offices for the
[[Page 60428]]
first time. However, we believe that the burden will decrease after the
initial filing because in subsequent filings, advisers will only be
reporting changes to their previously reported additional office
information. Two commenters requested clarification on how often the
additional office information should be updated.\108\ One commenter
felt that annual updating of office locations would not be unduly
burdensome but more frequent than annual updates would be
burdensome.\109\ We agree and are requiring that Section 1.F. of
Schedule D be updated as part of an adviser's annual updating amendment
and not more frequently.\110\
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\105\ LPL Letter; NASAA Letter.
\106\ ACG Letter; CFA Letter; Morningstar Letter; NRS Letter;
NYSBA Committee Letter.
\107\ Morningstar Letter.
\108\ ASG Letter; Morningstar Letter.
\109\ ASG Letter.
\110\ Amended Form ADV, General Instruction 4.
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One commenter expressed concern about our proposal's impact on
smaller advisers and suggested that, as an alternative, we require
advisers to (a) continue to provide information about their five
largest additional offices, (b) report their total number of additional
offices, and (c) report additional information only for their
additional offices that meet a certain threshold of regulatory assets
under management or that engage in certain enumerated practices of
interest to the Commission.\111\ We currently require advisers to track
their additional offices based upon number of employees.\112\ We
understand that many advisers do not currently track their additional
offices based upon the amount of regulatory assets under management
attributable to each office and we believe that requiring them to do so
would place an additional burden on advisers. For this reason, we are
not changing our approach to additional office reporting.
---------------------------------------------------------------------------
\111\ NRS Letter.
\112\ Form ADV, Part 1A, Item 1.F. and Section 1.F. of Schedule
D.
---------------------------------------------------------------------------
One commenter requested that we simplify the reporting of
information about additional offices for firms that are dually
registered as investment advisers with the Commission and as broker-
dealers with FINRA by allowing them to cross-reference to information
submitted on their Uniform Branch Office Registration Form filed with
FINRA.\113\ We agree and we are updating the IAPD system so that by
entering a branch's CRD number, the address, phone number, and
facsimile number of all additional offices will automatically populate
on Section 1.F. of Schedule D.
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\113\ MMI Letter.
---------------------------------------------------------------------------
Item 1.J. of Form ADV currently requires each adviser to provide
the name and contact information for the adviser's chief compliance
officer. We proposed amending Item 1.J. to require an adviser to report
whether its chief compliance officer is compensated or employed by any
person other than the adviser (or a related person of the adviser) for
providing chief compliance officer services to the adviser, and if so,
to report the name and IRS Employer Identification Number (if any) of
that other person. We are adopting the amendments to Item 1.J. largely
as proposed, but in addition to related persons of the adviser, as
discussed below, advisers will not be required to disclose the identity
of the other person compensating or employing the chief compliance
officer if that other person is an investment company registered under
the Investment Company Act of 1940 advised by the adviser.\114\
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\114\ Amended Form ADV, Part 1A, Item 1.J.
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As discussed in the Proposing Release, our examination staff has
observed a wide spectrum of both quality and effectiveness of
outsourced chief compliance officers and firms.\115\ Identifying
information for these third-party service providers, like others on
Form ADV,\116\ will allow us to identify all advisers relying on a
particular service provider and could be used to improve our ability to
assess potential risks.
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\115\ Proposing Release, supra footnote 3 at Section II.A.2.
\116\ For example, advisers provide the names and addresses of
independent public accountants that perform audits or surprise
examinations and that prepare internal control reports on Form ADV,
Part 1A, Schedule D, Section 9.C.
---------------------------------------------------------------------------
Two commenters expressed general support for our proposal to
identify if chief compliance officers are compensated or employed by
other parties for providing chief compliance officer services,\117\ and
others expressed concern that the requirement would be unduly
burdensome on advisers or that the information would be of little or no
use to the Commission or investors.\118\ We are not persuaded that this
requirement would be unduly burdensome because the adviser should have
or be able to easily obtain the necessary information, and we continue
to believe that this information will be valuable for the reasons
discussed above.
---------------------------------------------------------------------------
\117\ CFA Letter; NASAA Letter.
\118\ ACG Letter; Comment Letter of L.A. Schnase (Jul. 2, 2015)
(``Schnase Letter'') (would be duplicative of already reported
information, raises privacy concerns with the chief compliance
officer's other clients, would become inaccurate or out-of-date
quickly, and would miss the situation of firms hiring comprehensive
external compliance support with an in-house chief compliance
officer in name only). See also NRS Letter (adviser may not have
access to this information).
---------------------------------------------------------------------------
One commenter felt that our inquiry should focus not on the chief
compliance officer's other employment and/or compensation, but rather
on the details of the compliance program and resources committed to
address compliance risk (e.g., the chief compliance officer's education
and professional designations, the number of other compliance
employees, the estimated total hours spent on compliance, and the other
duties of the chief compliance officer).\119\ We agree with the
commenter's suggestion that evaluating the overall effectiveness of an
adviser's compliance program relies heavily on the facts and
circumstances specific to that adviser.\120\ However, we are adopting
the amendments to Item 1.J. largely as proposed, because we believe
that they meet our regulatory objective of identifying all advisers
relying on particular service providers and may improve our ability to
assess potential risks related to outsourced chief compliance officers
and firms.
---------------------------------------------------------------------------
\119\ Morgan Letter.
\120\ Id.
---------------------------------------------------------------------------
One commenter expressed concern that identifying outsourced chief
compliance officers would invite additional scrutiny about an adviser's
judgment in hiring externally versus internally.\121\ While we
understand the commenter's concerns, we continue to believe that
identifying information for these third-party service providers, like
others on Form ADV, will allow us to identify all advisers relying on a
particular service provider and to address potential risks associated
with that service provider.
---------------------------------------------------------------------------
\121\ Shearman Letter.
---------------------------------------------------------------------------
Two commenters agreed with our proposal to specifically exclude
situations where the chief compliance officer is paid or employed by a
related person of the adviser.\122\ Two other commenters recommended
that we specify that a related person includes a registered investment
company advised by the adviser.\123\ These commenters noted that in
many instances an individual may serve as the chief compliance officer
of both an adviser and a registered investment company advised by the
adviser and receive compensation from both the adviser and the
registered investment company.\124\ These commenters stated that
requiring advisers to disclose these arrangements does not further our
objective of assessing the use of third party service
[[Page 60429]]
providers.\125\ We agree and we have updated Item 1.J.(2) to exclude
chief compliance officers compensated or employed by an investment
company registered under the Investment Company Act of 1940 advised by
the adviser.
---------------------------------------------------------------------------
\122\ MMI Letter; Morningstar Letter.
\123\ Dechert Letter; IAA Letter.
\124\ Id.
\125\ Id.
---------------------------------------------------------------------------
In the Proposing Release, we asked whether we should require
information about an adviser's use of third-party compliance auditors.
Two commenters supported such disclosure,\126\ but several commenters
felt the disclosure would either not be useful or lead to incorrect
inferences about the decision to use, or not use, external compliance
support.\127\ Several commenters expressed concern that, due to the
diversity of services provided by third-party compliance auditors,
requiring an adviser to state whether or not it uses them would not be
useful to the Commission from a risk monitoring perspective.\128\
Commenters also expressed concern that requiring an adviser to report
on its use of third-party compliance auditors could lead to incorrect
inferences about the adviser's compliance program. For example,
advisers hiring third-party compliance auditors might be viewed as
signaling a compliance issue, whereas advisers not hiring them might be
viewed as not sufficiently focused on compliance.\129\ Two commenters
expressed concern about confidentiality issues implicated by third-
party compliance auditor reporting.\130\ We are not requiring advisers
to report information on Form ADV regarding third-party compliance
auditors at this time.
---------------------------------------------------------------------------
\126\ Comment Letter of Brown & Associates LLC (Aug. 10, 2015)
(``Brown Letter''); NASAA Letter.
\127\ ASG Letter; IAA Letter; MFA Letter; MMI Letter; NRS
Letter; NYSBA Committee Letter; PEGCC Letter.
\128\ IAA Letter; MFA Letter; NRS Letter; PEGCC Letter. See also
ASG Letter (requested that we more clearly define ``auditor''); JGAS
Letter; MMI Letter.
\129\ IAA Letter; NYSBA Committee Letter; PEGCC Letter.
\130\ Anonymous Letter; MMI Letter (these relationships are
often confidential, such as where law firms are involved).
---------------------------------------------------------------------------
We are amending Item 1.O. as proposed to require advisers with
assets of $1 billion or more to report their assets within three
ranges: (1) $1 billion to less than $10 billion; (2) $10 billion to
less than $50 billion; and (3) $50 billion or more.\131\ We added Item
1.O. in 2011 in connection with the Dodd-Frank Act's \132\ requirements
concerning certain incentive-based compensation arrangements.\133\
Advisers are currently required to check a box to indicate if they have
assets of $1 billion or more. Requiring advisers to report their assets
within one of the three specified ranges will provide more precise data
for use in Commission rulemaking arising from ongoing Dodd-Frank Act
implementation.\134\
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\131\ Amended Form ADV, Part 1A, Item 1.O.
\132\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\133\ See Rules Implementing Amendments to the Investment
Advisers Act of 1940, Investment Advisers Act Release No. 3221 (June
22, 2011) [76 FR 42950 (Jul. 19, 2011)] (``Implementing Release'')
at Section II.C.6; section 956 of the Dodd-Frank Act. We are also
moving the instruction for how to report ``assets'' for the purpose
of Item 1.O. from the Instructions for Part 1A to Form ADV to Item
1.O. in order to emphasize this instruction.
\134\ See, e.g., section 165(i) of the Dodd-Frank Act (requires
the Commission and other financial regulators to establish
methodologies for the conduct of stress tests by financial companies
with consolidated assets of over $10 billion); Incentive-based
Compensation Arrangements, Exchange Act Release No. 34-77776 (May 6,
2016) (identifies three categories of covered institutions based on
average total consolidated assets, ranging from $1 billion to $250
billion) (re-proposal of Exchange Act Release No. 34-64140);
Incentive-Based Compensation Arrangements, Exchange Act Release No.
34-64140 (Mar. 29, 2011) [76 FR 21170 (Apr. 14, 2011)].
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Two commenters expressed general support for our proposal to
require advisers to report their own assets within specified
ranges.\135\ Two commenters did not believe that the information would
be useful.\136\ However, we continue to believe that requiring advisers
to report their assets as described above will provide more accurate
data for use in Commission rulemaking arising from ongoing Dodd-Frank
Act implementation. Another commenter felt our proposal raised privacy
issues for investors in an adviser where the adviser is privately
held.\137\ While we are sensitive to privacy concerns, we believe that
we have narrowly tailored our proposal to address these concerns. We
are only requiring that advisers with significant assets (at least $1
billion) report them and even then only within one of the three
specified ranges. One commenter asked for clarification on the timing
of the calculation of assets.\138\ The item, as proposed and adopted
today, specifies that an adviser should use the total assets shown on
the adviser's balance sheet for the most recent fiscal year end.\139\
We did not receive comments on the specific asset ranges.
---------------------------------------------------------------------------
\135\ CFA Letter; PCA Letter.
\136\ NRS Letter; NYSBA Committee Letter.
\137\ Anonymous Letter.
\138\ PEGCC Letter.
\139\ Amended Form ADV, Part 1A, Item 1.O.
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b. Additional Information About Advisory Business
In addition to the amendments to Item 5 regarding separately
managed accounts discussed above, we are adopting a number of other
amendments to Item 5. Item 5 currently requires an adviser to provide
approximate ranges for three data points concerning the adviser's
business--the number of advisory clients, the types of advisory
clients, and regulatory assets under management attributable to client
types.\140\ As proposed, we are amending these items to require an
adviser to report the number of clients \141\ and amount of regulatory
assets under management attributable to each category of clients as of
the date the adviser determines its regulatory assets under
management.\142\ As we discussed in the Proposing Release, replacing
ranges with more precise information will provide more accurate
information about investment advisers and will significantly enhance
our ability to analyze data across investment advisers because
providing actual numbers of clients and regulatory assets under
management will allow us to see the scale and concentration of assets
by client type.\143\ It will also allow us to determine the regulatory
assets under management attributable to separately managed accounts. We
believe that the information needed for providing the number of clients
and amount of regulatory assets under management by client type should
be readily available to advisers because advisers are producing this
data to answer the current iterations of these questions on Form ADV
and advisers typically base their advisory fees on client assets under
management.
---------------------------------------------------------------------------
\140\ Form ADV, Part 1A, Item 5.C.(1), Item 5.D.(1)-(2).
\141\ Amended Form ADV, Part 1A, Item 5.D.(1)-(2). Advisers with
fewer than five clients in a particular category (other than
investment companies, business development companies and other
pooled investment vehicles) may check Item 5.D.(2) indicating that
fact rather than report the actual number of clients in the
particular category in Item 5.D.(1).
\142\ Amended Form ADV, Part 1A, Item 5.D.(3). The categories of
clients are the same as those in Item 5.D. of the current Form ADV,
except that we are adding ``sovereign wealth funds and foreign
official institutions'' as a client category, and specifying that
state or municipal government entities include government pension
plans, and that government pension plans should not be counted as
pension and profit sharing plans.
\143\ Proposing Release, supra footnote 3 at Section II.A.2.
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We also are adding to Item 5 as proposed a requirement for advisers
to report the number of clients for whom they provided advisory
services but do not have regulatory assets under management in order to
obtain a more complete understanding of each
[[Page 60430]]
adviser's advisory business.\144\ As we explained in the Proposing
Release, this information will assist in our risk assessment process
and increase the effectiveness of our examinations.\145\
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\144\ Amended Form ADV, Part 1A, Item 5.C.(1). An example of a
situation where an adviser provides investment advice but does not
have regulatory assets under management is a nondiscretionary
account or a one-time financial plan, depending on the facts and
circumstances.
\145\ Proposing Release, supra footnote 3 at Section II.A.2.
---------------------------------------------------------------------------
Some commenters were generally supportive of our proposal to
replace ranges with more precise information.\146\ Several commenters
stated that advisers would need to update computer systems to obtain
this data, and raised concerns about the increased burden that our
proposal would place on advisers.\147\ One commenter felt that removing
an adviser's ability to rely on estimates of the amount of regulatory
assets under management would increase the time required to prepare
Item 5.D.\148\ We are not convinced that the burden placed on advisers
by the requirement to report precise information will be significant.
We continue to believe that the required information should be readily
available to advisers because advisers are producing this data to
answer the current iterations of these questions on Form ADV and
advisers typically base their advisory fees on client assets under
management.
---------------------------------------------------------------------------
\146\ NRS Letter; PCA Letter; CFA Letter (generally supportive
but questions the usefulness of actual numbers rather than ranges);
NASAA Letter (supports reporting the number of clients for whom an
adviser provides advisory services but does not have regulatory
assets under management).
\147\ ASG Letter; MMI Letter. See LPL Letter.
\148\ ASG Letter.
---------------------------------------------------------------------------
Some commenters suggested that our proposal to replace ranges with
more precise information would heighten the risk of inaccurate
reporting on Form ADV.\149\ Commenters suggested that instead of
requiring more precise information, we require advisers to report only
an approximate number of clients and regulatory assets under management
so as not to penalize advisers for ``minor or inadvertent
inaccuracies'' \150\ and one commenter suggested using narrower
ranges.\151\ Our goal in collecting more precise information is not to
penalize advisers for minor inaccuracies but to enhance our ability to
analyze data across investment advisers and allow us to see the scale
and concentration of assets by client type. We collect numerical data
throughout Form ADV, and we believe that advisers have access to the
information required to accurately complete Item 5.
---------------------------------------------------------------------------
\149\ ASG Letter; LPL Letter; MMI Letter.
\150\ LPL Letter. See also IAA Letter.
\151\ MMI Letter.
---------------------------------------------------------------------------
One commenter expressed skepticism that the amendments would
provide new, meaningful information to investors.\152\ However, we
believe that investors potentially will benefit from having a more
complete understanding of an investment adviser's business. In
addition, we believe that investors will indirectly benefit from our
enhanced ability to analyze data across investment advisers, including
the scale and concentration of assets by client type.
---------------------------------------------------------------------------
\152\ ACG Letter.
---------------------------------------------------------------------------
One commenter expressed concern that the reporting of precise
numbers might reveal confidential client relationships or the amount of
regulatory assets under management attributable to specific
clients.\153\ We are sensitive to these privacy concerns, and, as noted
above, we are revising Form ADV, Part 1A, Item 5.D. to allow advisers
with fewer than five clients in a particular category (other than
investment companies, business development companies and other pooled
investment vehicles) to check Item 5.D.(2) indicating that fact rather
than report the actual number of clients in the particular category in
Item 5.D.(1).\154\
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\153\ Anonymous Letter.
\154\ Amended Form ADV, Part 1A, Item 5.D.(1)-(2).
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Several commenters requested clarification in situations where a
client fits into more than one client category.\155\ Specifically, two
commenters requested that the Commission clarify whether an adviser
that has contracts with other advisers to sub-advise registered
investment companies, business development companies or pooled
investment vehicles should categorize those clients as either (1)
``other investment advisers'' because other investment advisers hold
the contracts, or as (2) ``investment companies,'' ``business
development companies,'' or ``pooled investment vehicles,'' as
applicable, because those entities hold the regulatory assets under
management.\156\ We are updating the instructions to Item 5.D. to state
that, to the extent that the adviser advises a registered investment
company, business development company, or pooled investment vehicle,
the adviser should report those sub-advised assets in categories (d),
(e), or (f) as applicable.\157\ We also are amending the instructions
in the text preceding Item 5.D., in response to a comment that we
received,\158\ to state that if a client fits into more than one
category, then the adviser should select the category that most
accurately represents the client in order to avoid double counting
clients and assets.\159\
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\155\ Anonymous Letter; ASG Letter; IAA Letter; SIFMA Letter.
\156\ ASG Letter; IAA Letter.
\157\ Amended Form ADV, Part 1A, Item 5.D.
\158\ SIFMA Letter.
\159\ Amended Form ADV, Part 1A, Item 5.D.
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Some commenters requested more specific definitions for the
categories of clients.\160\ However, most of the categories have not
changed from current Form ADV and, based upon our experience with Form
ADV, we believe that they are sufficiently clear. At the suggestion of
two commenters,\161\ we are moving the category labeled ``Corporations
or other businesses not listed above'' down in the table so that it
appears just above the category labeled ``Other.'' \162\
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\160\ IAA Letter (Commission should clarify whether a
``sovereign wealth fund and foreign official institution'' includes
the account of any government or quasi-government entity).
Morningstar Letter (Commission should add definitions for
categories, including ``other,'' and provide a list of common
custodian account types and how they map to the client categories).
\161\ IAA Letter; SIFMA Letter.
\162\ Amended Form ADV, Part 1A, Item 5.D.
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We are adopting, largely as proposed, several targeted additions to
Item 5 and Section 5 of Schedule D to inform our risk-based exam
program and other risk monitoring initiatives. An adviser that elects
to report client assets in Part 2A of Form ADV differently from the
regulatory assets under management it reports in Part 1A of Form ADV is
now required to check a box noting that election.\163\ As discussed in
the Proposing Release, this information will allow our examination
staff to review across advisers the extent to which advisers report
assets under management in Part 2A that differ from the regulatory
assets under management reported in Part 1A of Form ADV.\164\ Having
this information will allow our staff to better understand the
situations
[[Page 60431]]
in which the calculations differ, and assist us in analyzing whether
those differences require a regulatory response.
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\163\ Amended Form ADV, Part 1A, Item 5.J.(2). Form ADV, Part
2A, Item 4.E. requires an investment adviser to disclose the amount
of client assets it manages on a discretionary basis and on a non-
discretionary basis. The method used by an adviser to compute the
amount of client assets it manages can be different from the method
used to compute regulatory assets under management required for Item
5.F. in Part 1A. As discussed in the proposing release for Part 2,
the regulatory assets under management calculation for Part 1A is
designed for a particular purpose (i.e., for making a bright line
determination about whether an adviser should register with the
Commission or with the states) and permitting a different
calculation for Part 2 disclosure may be appropriate to enable
advisers to make disclosure that is more indicative to clients about
the nature of their business. See Amendments to Form ADV, Investment
Advisers Act Release No. 2711 (Mar. 3, 2008) [73 FR 13958 (Mar. 14,
2008)].
\164\ Proposing Release, supra footnote 3 at Section II.A.2.
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One commenter asserted that this information would not be
meaningful to investors.\165\ Another commenter noted that advisers may
report additional assets in Part 2A of Form ADV, rather than calculate
regulatory assets under management differently than they do in Part 1A
of Form ADV.\166\ We continue to believe that Item 5.J.(2) will provide
the staff with helpful information regarding these calculations.
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\165\ ACG Letter.
\166\ PCA Letter (stating that when advisers report different
client assets in Part 2A than regulatory assets under management in
Part 1A of Form ADV, it is frequently due to additional assets being
included in the Part 2A calculation, such as non-discretionary
assets that are under ``advisement,'' rather than a different method
of calculating assets under management).
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In addition, largely as proposed, we are adding a question asking
the approximate amount of an adviser's total regulatory assets under
management that is attributable to clients that are non-United States
persons \167\ to complement the current requirement that each adviser
report the percentage of its clients that are non-United States
persons, which, based on our experience, is not always a reliable
indicator of an adviser's relationships with non-U.S. clients.\168\ As
noted in the Proposing Release, our examination staff can use this
information to better understand the extent of investment advice
provided to non-U.S. clients which will assist in our risk assessment
process.\169\ In our proposal, we used the term ``non-U.S. client'' and
commenters sought clarification of the definition of ``non-U.S.
client.'' \170\ In response, the amendments that we are adopting today
use the term ``non-United States person'' in Item 5.F.(3). The Glossary
to Form ADV provides that ``United States person'' has the same meaning
as in rule 203(m)-1 under the Advisers Act, which includes any natural
person that is resident in the United States.
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\167\ Amended Form ADV, Part 1A, Item 5.F.(3).
\168\ Form ADV, Part 1A, Item 5.C.(2). For example, an adviser
may report a significant percentage of clients that are non-United
States persons, but the regulatory assets under management
attributable to those clients is a small percentage of the adviser's
regulatory assets under management.
\169\ Proposing Release, supra footnote 3 at Section II.A.2.
\170\ Oppenheimer Letter; SIFMA Letter.
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Section 5.G.(3) of Schedule D currently requires advisers to report
the SEC File Number for registered investment companies and business
development companies that they advise. Largely as proposed, we are
adding to Section 5.G.(3) a requirement that advisers report the
regulatory assets under management of all parallel managed accounts
related to a registered investment company (or series thereof) or
business development company that they advise.\171\ As described in the
Proposing Release, this information will permit our staff to assess the
accounts and consider how an adviser manages conflicts of interest
between parallel managed accounts and registered investment companies
or business development companies advised by the adviser.\172\ This
information also will show the extent of any shift in assets between
parallel managed accounts and registered investment companies or
business development companies.
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\171\ Amended Form ADV, Part 1A, Section 5.G.(3) of Schedule D.
The Glossary to Amended Form ADV includes ``parallel managed
account,'' which is defined as: ``With respect to any registered
investment company or series thereof or business development
company, a parallel managed account is any managed account or other
pool of assets that you advise and that pursues substantially the
same investment objective and strategy and invests side by side in
substantially the same positions as the identified investment
company or series thereof or business development company that you
advise.''
\172\ Proposing Release, supra footnote 3 at Section II.A.2.
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Some commenters questioned the usefulness of collecting information
on parallel managed accounts \173\ or thought that disclosures about
parallel managed accounts would not produce meaningful results or could
be misleading.\174\ We recognize that there may be different reasons
for assets to shift between parallel managed accounts and registered
investment companies or business development companies, but that does
not make the additional information less useful to the staff in
considering how advisers manage conflicts of interest and assessing the
extent of any shift in assets for risk monitoring purposes.
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\173\ BlackRock Letter (suggesting that asking during
examinations for an adviser's policies related to fair treatment of
all accounts, and testing of compliance with those policies, would
better achieve the objective); IAA Letter; Comment Letter of Small
Business Investor Alliance (Aug. 11, 2015) (``SBIA Letter'')
(opining that the proposal adds unnecessary reporting for advisers
of business development companies and is duplicative of Form N-2).
We believe the information to be collected in Section 5.G.(3) is
different from the information collected on Form N-2 regarding
closed-end funds and business development companies because the
information collected on Form N-2 regarding management of other
accounts focuses on individual portfolio managers, while the
information collected on Form ADV is reported at the adviser level.
\174\ Anonymous Letter (stating there are many reasons assets
could shift between parallel managed accounts and registered
investment companies or business development companies); BlackRock
Letter.
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Some commenters noted that registered investment companies often
have multiple series, each with its own portfolio manager, investment
strategy, and holdings; and that the concept of a parallel managed
account could only be applied in the registered investment company
context on a series-by-series basis.\175\ In response, we have updated
Section 5.G.(3) to clarify that parallel managed accounts related to a
registered investment company (or a series thereof) should be reported.
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\175\ IAA Letter; Oppenheimer Letter; SIFMA Letter.
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One commenter felt that advisers would have difficulty interpreting
the requirement that a parallel managed account pursue ``substantially
the same investment objective and strategy'' as the relevant investment
company or business development company.\176\ Advisers should use their
best judgment and make a good faith determination as to whether the
investment objectives and strategies in question are ``substantially
the same.'' We note that many private fund advisers already make this
determination when filling out Form PF.\177\
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\176\ PCA Letter.
\177\ The definition of ``parallel managed account,'' supra
footnote 171, is consistent with the Form PF definition of
``parallel managed account.'' Form PF, Glossary of Terms.
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One commenter asked for confirmation that the value of derivatives
held in a parallel managed account should be calculated using the
market value of the derivatives rather than the gross notional value,
if that is how the value of the account is reported to the account
holder.\178\ We agree that market value should be used in such a
case.\179\
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\178\ IAA Letter.
\179\ This approach is consistent with the staff's view on how
the value of a parallel managed account should be calculated on Form
PF. See Form PF, Frequently Asked Questions. The staff's response to
Question 11 on reporting value states that ``When calculating the
value of a parallel managed account for purposes of either
determining whether it is a dependent parallel managed account that
is aggregated with the reporting fund or reporting its value in
Question 11, you should use the market value of the derivatives held
in the parallel managed account, instead of the gross notional
value, if that is how the value of the account is reported to the
account holder.''
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Finally, we are amending Item 5, largely as proposed, to obtain
additional information concerning wrap fee programs.\180\ Item 5.I. of
Part 1A currently requires an adviser to indicate whether it serves as
a sponsor of or portfolio manager for a wrap fee
[[Page 60432]]
program. We are amending Item 5.I. to ask whether the adviser
participates in a wrap fee program, and if so, the total amount of
regulatory assets under management attributable to acting as a sponsor
to or portfolio manager for a wrap fee program.\181\ One commenter
noted that many advisers act as both the sponsor of and a portfolio
manager for the same wrap fee program and that this could cause those
advisers to double count their regulatory assets under management
attributable to wrap fee programs in Item 5.I.\182\ We agree and have
added a question to Item 5.I. that asks for the total amount of
regulatory assets under management attributable to the adviser acting
as both sponsor to and portfolio manager for the same wrap fee program.
To prevent advisers from double-counting assets, we added an
instruction that assets reported in this new category should not be
reported elsewhere in Item 5.I.(2).
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\180\ The Glossary to Form ADV defines a wrap fee program as
``[a]ny advisory program under which a specified fee or fees not
based directly upon transactions in a client's account is charged
for investment advisory services (which may include portfolio
management or advice concerning the selection of other investment
advisers) and the execution of client transactions.'' We are not
amending this definition.
\181\ Amended Form ADV, Part 1A, Item 5.I.
\182\ MMI Letter.
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Section 5.I.(2) of Schedule D currently requires an adviser to list
the name and sponsor of each wrap fee program for which the adviser
serves as portfolio manager. We are amending Section 5.I.(2), as
proposed, to add questions that require an adviser to provide any SEC
File Number and CRD Number for sponsors to those wrap fee
programs.\183\ As discussed in the Proposing Release, this information
will help us better understand a particular adviser's business and
assist in our risk assessment and examination process by making it
easier for our staff to identify the extent to which the firm acts as
sponsor or portfolio manager of wrap fee programs and collect
information across investment advisers involved in a particular wrap
fee program.\184\
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\183\ Amended Form ADV, Part 1A, Section 5.I.(2) of Schedule D.
\184\ Proposing Release, supra footnote 3 at Section II.A.2.
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One commenter was generally supportive of our proposed reporting on
wrap fee programs, but questioned its usefulness to investors and
market participants.\185\ As discussed above, our enhanced wrap fee
reporting is designed to assist our staff in its risk assessment and
examination process. Three commenters requested further clarification
regarding the existing definition of a wrap fee program.\186\ We are
not changing or clarifying the existing definition of a ``wrap fee
program'' that is included in Form ADV because, based on our experience
with the Form, we believe it has been sufficiently clear.
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\185\ CFA Letter.
\186\ ASG Letter (asking whether an adviser will be deemed to
participate in a wrap fee program if the adviser negotiates an
asset-based fee with a broker and pays that fee rather than having
the client pay that fee); PCA Letter (asking whether an adviser will
be deemed to ``participate'' in a wrap fee program as a result of
placing client funds (or recommending that clients place non-
discretionary funds) in one or more programs sponsored by
unaffiliated third parties, but in which the adviser does not serve
as the sponsor or a portfolio manager). See also NRS Letter
(suggesting that we require wrap fee program sponsors to report the
combined regulatory assets under management for themselves and any
independent portfolio managers in their program).
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c. Additional Information About Financial Industry Affiliations and
Private Fund Reporting
Part 1A, Section 7.A. of Schedule D requires information on an
adviser's financial industry affiliations and Section 7.B.(1) of
Schedule D requires information on private funds managed by the
adviser. We are adopting as proposed amendments to Sections 7.A. and
7.B.(1) of Schedule D that require an adviser to provide identifying
numbers (i.e., Public Company Accounting Oversight Board (``PCAOB'')-
assigned numbers \187\ and CIK Numbers \188\) in response to two
questions to allow us to better compare information across data sets
and understand the relationships of advisers to other financial service
providers.
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\187\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23(e).
\188\ Amended Form ADV, Part 1A, Section 7.A of Schedule D,
Question 4(b).
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Two commenters were concerned that, by requiring an adviser to
report the PCAOB-assigned number of its auditing firm (if applicable),
we are suggesting that using a PCAOB-registered auditing firm is
required by the Commission.\189\ This is not our intent. An auditing
firm performing a surprise examination is not required to be registered
with the PCAOB unless the adviser or its related person is serving as
qualified custodian.\190\
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\189\ Shearman Letter. See Comment Letter of American Institute
of Certified Public Accountants, Financial Reporting Executive
Committee (Aug. 17, 2015) (``AICPA Letter'').
\190\ Rules 206(4)-2(a)(4) and 206(4)-2(a)(6)(i).
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In addition, we are adding a question to Section 7.B.(1) of
Schedule D to require an adviser to a private fund that qualifies for
the exclusion from the definition of investment company under section
3(c)(1) of the Investment Company Act of 1940 (a ``3(c)(1) fund'') to
report whether it limits sales of the fund to qualified clients, as
defined in rule 205-3 under the Advisers Act.\191\ As proposed, the
question would have required an adviser to report, for every private
fund that it advises (including any private fund that qualifies for the
exclusion from the definition of ``investment company'' under section
3(c)(7) of the Investment Company Act of 1940 (``3(c)(7) fund''), the
approximate percentage of the private fund beneficially owned (in the
aggregate) by qualified clients.\192\ One commenter supported the
rationale for our proposal; \193\ however other commenters questioned
the value of the question and were concerned about situations where the
qualified client status of an investor is not known, or does not need
to be determined.\194\ We continue to believe that this information
will give us a better sense of the financial sophistication and nature
of investors in private funds, but in response to comments, we are
making two changes from our proposal.
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\191\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 15(b). Current Question 15 will become Question 15(a).
\192\ Proposed Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 15(b).
\193\ CFA Letter.
\194\ ACG Letter; Anonymous Letter; SBIA Letter.
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First, we are limiting the question to 3(c)(1) funds because each
investor in a 3(c)(7) fund is required to meet the higher ``qualified
purchaser'' standard.\195\ Second, we are revising the question to
require a simple yes or no response as to whether the adviser limits
sales of a fund to qualified clients instead of requiring advisers to
report the percentage of ownership of the fund by qualified clients.
Commenters noted that many advisers that are not registered with the
Commission (e.g., exempt reporting advisers \196\) are not required to
determine whether the fund's investors are qualified clients.\197\
These advisers may simply respond ``No'' to the revised question. Other
commenters asked us to clarify whether advisers must re-certify the
qualified client status of their investors annually.\198\ As long as an
investor met
[[Page 60433]]
the definition of a ``qualified client'' when it entered into the
advisory contract with the adviser, then the investor is considered a
``qualified client'' even if it no longer meets the dollar amount
thresholds of the rule. This is consistent with our existing approach
to the definition of qualified client.\199\
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\195\ ``Qualified purchaser'' is defined in Section 2(a)(51) of
the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(51)).
\196\ An exempt reporting adviser is an investment adviser that
qualifies for the exemption from registration under section 203(l)
of the Advisers Act because it is an adviser solely to one or more
venture capital funds, or under rule 203(m)-1 under the Advisers Act
because it is an adviser solely to private funds and has assets
under management in the United States of less than $150 million. See
Form ADV, Glossary.
\197\ ACG Letter; SBIA Letter. See also Anonymous Letter.
Section 205(a) of the Advisers Act only applies to advisers who are
registered or required to be registered with the Commission and
generally restricts advisers from entering into, extending,
renewing, or performing any advisory contract that provides for
performance-based compensation. Rule 205-3 permits advisers to
charge performance-based compensation to ``qualified clients,'' as
defined in the rule. Advisers who are registered or required to be
registered with the Commission are otherwise prohibited from
charging performance-based compensation.
\198\ JGAS Letter; SBIA Letter. See also PCA Letter.
\199\ See Investment Adviser Performance Compensation,
Investment Advisers Act Release No. 3372 (Feb. 15, 2012) [77 FR
10358 (Feb. 22, 2012)].
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3. Umbrella Registration
We are adopting, as proposed, amendments to Form ADV that codify
umbrella registration for certain advisers to private funds. We are
adopting the amendments today because we believe that umbrella
registration should be made available to those private fund advisers
that are registered with us and operate a single advisory business
through multiple legal entities. Umbrella registration is not
mandatory, but we believe it will simplify the registration process for
these advisers, and provide additional and more consistent data about,
and create a clearer picture of, groups of private fund advisers that
operate a single advisory business through multiple legal entities. The
amendments also will allow for greater comparability across private
fund advisers.
As we discussed in the Proposing Release, the Dodd-Frank Act
repealed the private adviser exemption that used to be in section
203(b)(3) of the Advisers Act.\200\ As a result, many previously
unregistered advisers to private funds,\201\ including hedge funds and
private equity funds, were required to register under the Advisers Act.
Today, about 4,469 registered investment advisers provide advice on
approximately $10.5 trillion in assets to approximately 30,896 private
funds clients.\202\
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\200\ Section 403 of the Dodd-Frank Act. Section 203(b)(3) of
the Advisers Act (the ``private adviser exemption'') previously
exempted any investment adviser from registration if the investment
adviser (i) had fewer than 15 clients in the preceding 12 months,
(ii) did not hold itself out to the public as an investment adviser
and (iii) did not act as an investment adviser to a registered
investment company or a company that elected to be a business
development company.
\201\ Section 202(a)(29) of the Advisers Act defines the term
``private fund'' as ``an issuer that would be an investment company,
as defined in section 3 of the Investment Company Act of 1940 (15
U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act.''
\202\ Based on IARD system data as of May 16, 2016.
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For a variety of tax, legal and regulatory reasons, advisers to
private funds may be organized as a group of related advisers that are
separate legal entities but effectively operate as--and appear to
investors and regulators to be--a single advisory business. Although
these separate legal entities effectively operate as a single advisory
business,\203\ Form ADV was designed to accommodate the registration
request of an adviser structured as a single legal entity. As a result,
private fund advisers that operated as a single advisory business but
were organized as separate legal entities may have had to file multiple
registration forms, even though the registration effectively was for
the same advisory business. Multiple Form ADVs for a single advisory
business may distort the data we collect on Form ADV and use in our
regulatory program, be less efficient and more costly for advisers, and
may be confusing to the public researching an adviser on our Web site.
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\203\ We treat as a single adviser two or more affiliated
advisers that are separate legal entities but are operationally
integrated, which could result in a requirement for one or both
advisers to register. See Exemptions for Advisers to Venture Capital
Funds, Private Fund Advisers With Less Than $150 Million in Assets
Under Management, and Foreign Private Advisers, Investment Advisers
Act Release No. 3222 (June 22, 2011) [76 FR 39646 (Jul. 6, 2011)]
(``Exemptions Release''). See also In the Matter of TL Ventures
Inc., Investment Advisers Act Release No. 3859 (June 20, 2014)
(settled action).
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Our staff provided guidance to private fund advisers before the
compliance date of the Dodd-Frank Act private fund adviser registration
requirements designed to address concerns raised by advisers.\204\ The
guidance provided conditions under which the staff believed one adviser
(the ``filing adviser'') could file a single Form ADV on behalf of
itself and other advisers that were controlled by or under common
control with the filing adviser (each, a ``relying adviser''), provided
that they conducted a single advisory business (collectively an
``umbrella registration'').
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\204\ See 2012 ABA Letter, supra footnote 5. The Division of
Investment Management previously provided no-action relief to enable
a special purpose vehicle (``SPV'') that acts as a private fund's
general partner or managing member to essentially rely upon its
parent adviser's registration with the Commission rather than
separately register. See American Bar Association Subcommittee on
Private Investment Entities, SEC Staff Letter (Dec. 8, 2005),
available at http://www.sec.gov/divisions/investment/noaction/aba120805.htm (``2005 ABA Letter'') at Question G1.
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We believe that most advisers that can rely on umbrella
registration are doing so, with approximately 743 filing advisers and
approximately 2,587 relying advisers filing umbrella
registrations.\205\ However, the method outlined in the staff guidance
for filing an umbrella registration was limited by the fact that the
form was designed for a single legal entity. This created confusion for
filers and the public. It also complicated our staff's data collection
and analysis on umbrella registrants.\206\ Today's amendments are
designed to ameliorate these issues.
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\205\ Based on IARD system data as of May 16, 2016.
\206\ Under the guidance provided by the staff, for example,
umbrella registration was appropriate where a relying adviser was
not prohibited from registering with the Commission by section 203A
of the Advisers Act. See 2012 ABA Letter, supra footnote 5. However,
a relying adviser did not have a way to answer Item 2 regarding the
basis on which it was eligible for SEC registration. In addition,
relying advisers often had to list owners and executive officers in
a confusing manner in Schedules A and B which were not designed to
accommodate multiple advisers and did not always provide the
Commission staff with useful information on the owners of each
relying adviser. Also, the filing adviser disclosed its reliance on
the 2012 ABA Letter in the Miscellaneous Section of Schedule D.
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We are adopting, as proposed, amendments to Form ADV's General
Instructions that establish conditions for an adviser to assess whether
umbrella registration is available. The conditions we are adopting
today are the same as the conditions set forth in the staff's guidance
that many investment advisers have relied on since 2012 (except that
the staff's guidance also included disclosure conditions for Form ADV,
the substance of which is covered elsewhere in this Release).\207\ The
conditions are as follows:
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\207\ See 2012 ABA Letter, supra footnote 5 at Question 4.
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1. The filing adviser and each relying adviser advise only private
funds and clients in separately managed accounts that are qualified
clients (as defined in rule 205-3 under the Advisers Act) and are
otherwise eligible to invest in the private funds advised by the filing
adviser or a relying adviser and whose accounts pursue investment
objectives and strategies that are substantially similar or otherwise
related to those private funds;
2. The filing adviser has its principal office and place of
business in the United States and, therefore, all of the substantive
provisions of the Advisers Act and the rules thereunder apply to the
filing adviser's and each relying adviser's dealings with each of its
clients, regardless of whether any client or the filing adviser or
relying adviser providing the advice is a United States person; \208\
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\208\ The Glossary to Form ADV provides that ``United States
person'' has the same meaning as in rule 203(m)-1 under the Advisers
Act, which includes any natural person that is resident in the
United States.
---------------------------------------------------------------------------
3. Each relying adviser, its employees and the persons acting on
its behalf are subject to the filing adviser's supervision and control
and, therefore, each relying adviser, its employees and
[[Page 60434]]
the persons acting on its behalf are ``persons associated with'' the
filing adviser (as defined in section 202(a)(17) of the Advisers Act);
4. The advisory activities of each relying adviser are subject to
the Advisers Act and the rules thereunder, and each relying adviser is
subject to examination by the Commission; and
5. The filing adviser and each relying adviser operate under a
single code of ethics adopted in accordance with rule 204A-1 under the
Advisers Act and a single set of written policies and procedures
adopted and implemented in accordance with rule 206(4)-(7) under the
Advisers Act and administered by a single chief compliance officer in
accordance with that rule.\209\
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\209\ The code of ethics and written policies and procedures
must be administered as if the filing adviser and each relying
adviser are part of a single entity, although they may take into
account, for example, that a relying adviser operating in a
different jurisdiction may have obligations that differ from the
filing adviser or another relying adviser.
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The conditions are designed to limit eligibility for umbrella
registration to groups of private fund advisers that operate as a
single advisory business. For purposes of umbrella registration, we
consider the following factors as indicia of a single advisory
business: Commonality of advisory services and clients; a consistent
application of the Advisers Act and the rules thereunder to all
advisers in the business; and a unified compliance program. The
conditions that we are adopting today are designed to demonstrate these
factors. Condition 1 limits eligibility for umbrella registration to
private fund advisers with a commonality of advisory services and
clients. Conditions 2 and 4 are designed to provide assurance that our
staff has access to and can readily examine the filing and relying
advisers and that the Advisers Act and the rules thereunder fully apply
to all advisers under the umbrella registration and clients of those
advisers. Conditions 3 and 5 are designed to provide assurance that the
filing and relying advisers are subject to a unified compliance
program. Based on our experience, we believe that the conditions, when
taken together, are a strong indication of the existence of a single
private fund advisory business operating through the use of multiple
legal entities.
In addition, we are amending the General Instructions as proposed
to provide advisers using umbrella registration directions on
completing Form ADV for the filing adviser and each relying adviser,
including details for filing umbrella registration requests and the
timing of filings and amendments in connection with an umbrella
registration.\210\ To satisfy the requirements of Form ADV while using
umbrella registration, the filing adviser is required to file, and
update as required, a single Form ADV (Parts 1 and 2) that relates to,
and includes all information concerning, the filing adviser and each
relying adviser, and must include this same information in any other
reports or filings it must make under the Advisers Act or the rules
thereunder (e.g., Form PF). The revisions to the form's Instructions
and Form ADV further specify those questions that should be answered
solely with respect to the filing adviser and those that require the
filing adviser to answer on behalf of itself and its relying
adviser(s).\211\ Additionally, we are amending the Glossary as proposed
to add the following three terms: (i) ``filing adviser;'' \212\ (ii)
``relying adviser;'' \213\ and (iii) ``umbrella registration.'' \214\
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\210\ See Form ADV, General Instruction 5.
\211\ See, e.g., statements added to Form ADV, Instructions and
Part 1A, Items 1, 2, 3, 7, 10 and 11.
\212\ ``Filing Adviser'' means: ``An investment adviser eligible
to register with the SEC that files (and amends) a single umbrella
registration on behalf of itself and each of its relying advisers.''
See Form ADV, Glossary.
\213\ ``Relying Adviser'' means: ``An investment adviser
eligible to register with the SEC that relies on a filing adviser to
file (and amend) a single umbrella registration on its behalf.'' See
Form ADV, Glossary.
\214\ ``Umbrella Registration'' means: ``A single registration
by a filing adviser and one or more relying advisers who
collectively conduct a single advisory business and that meet the
conditions set forth in General Instruction 5.'' See Form ADV,
Glossary.
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We also are adopting as proposed a new schedule to Part 1A--
Schedule R--that must be filed for each relying adviser.\215\ Schedule
R requires identifying information, basis for SEC registration, and
ownership information about each relying adviser, some of which was
already filed by an adviser relying on the staff guidance.\216\ This
new schedule consolidates in one location information for each relying
adviser and addresses the problem the staff faced in its guidance that
resulted in information regarding relying advisers being submitted in
response to a number of different items on the Form, in ways not
consistent across advisers, due to the fact that Form ADV was not
designed to accommodate umbrella registration.\217\ We believe that
certain information that we are requiring (such as mailing address and
basis for registration) is the same for nearly all relying advisers,
and the filing adviser can check a box indicating that the mailing
address of the relying advisers is the same as that of the filing
adviser. Finally, we are adding, as proposed, a new question to
Schedule D that requires advisers to identify the filing advisers and
relying advisers that manage or sponsor private funds reported on Form
ADV.\218\ This information will allow us to identify the specific
adviser managing the private fund reported on Form ADV if it is part of
an umbrella registration. We believe that this information will help us
better understand the management of private funds, will provide
information to contact relying advisers, and will help us better
understand the relationship between relying advisers and filing
advisers.
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\215\ Advisers that choose to file an umbrella registration are
directed by Item 1.B. to complete a new Schedule R for each relying
adviser. Form ADV, Part 1A, Item 1.B.(2).
\216\ Schedule R requires the following information for each
relying adviser: Identifying information (Section 1); basis for SEC
registration (Section 2); form of organization (Section 3) and
control persons (Section 4). For basis for SEC registration (Section
2), we did not include categories that would make the relying
adviser ineligible for umbrella registration, such as serving as an
adviser to a registered investment company.
\217\ Under the staff's guidance in the 2012 ABA Letter, an
adviser reported in its Form ADV (Miscellaneous Section of Schedule
D) that it and its relying advisers were together filing a single
Form ADV in reliance on the position expressed in the letter and
identified each relying adviser by completing a separate Section
1.B., Schedule D, of Form ADV for each relying adviser and
identified it as such by including the notation ``(relying
adviser).'' See 2012 ABA Letter, supra footnote 5 at Question 4.
\218\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
3(b).
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We received multiple comment letters regarding our proposal to
codify umbrella registration, the vast majority of which expressed
support for umbrella registration.\219\ Several commenters also agreed
that umbrella registration should not be mandatory.\220\ However,
several commenters urged the Commission to expand the eligibility for
umbrella registration to additional advisers including non-U.S. filing
advisers, exempt reporting advisers, advisers to other types of
clients, and advisers not independently eligible to register with the
Commission.\221\
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\219\ See, e.g., ABA Committee Letter; ACG Letter; AIMA Letter;
ASG Letter; BlackRock Letter; CFA Letter; Dechert Letter; MFA
Letter; NASAA Letter; NRS Letter; NYSBA Committee Letter; PCA
Letter; PEGCC Letter; SBIA Letter; Schulte Letter; Shearman Letter;
SIFMA Letter.
\220\ ABA Committee Letter; ASG Letter; BlackRock Letter;
Dechert Letter.
\221\ One commenter suggested that advisers that can, but do not
elect to, file an umbrella registration be required to note that on
Form ADV. CFA Letter.
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Many commenters encouraged us to permit umbrella registration for
non-
[[Page 60435]]
U.S. filing advisers.\222\ However, as we previously have expressed, we
remain concerned that, absent Condition 2 (which requires that the
filing adviser have its principal place of business in the United
States), a group of related advisers based inside and outside of the
United States could designate a non-U.S. adviser as a filing adviser,
and could assert, based on the theory of operating a single advisory
business, that the Advisers Act's substantive provisions generally
would not apply to the U.S.-based relying advisers' dealings with their
non-U.S. clients.\223\ Many commenters acknowledged this concern.\224\
Some commenters suggested that we address the concern by requiring that
advisers indicate on their umbrella registration that they will follow
applicable law.\225\ We believe that Condition 2 eliminates the
difficult determinations of the Advisers Act's application to these
advisory relationships. The amendments we are adopting today do not
change the Commission's statements with respect to the cross-border
application of the Advisers Act.\226\
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\222\ ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA
Committee Letter; Schulte Letter. See also Shearman Letter.
\223\ 2012 ABA Letter, supra footnote 5 at n.9; See Exemptions
Release, supra footnote 203 at Section II.D.
\224\ ABA Committee Letter; AIMA Letter; NYSBA Committee Letter;
Schulte Letter; Shearman Letter.
\225\ AIMA Letter; NYSBA Committee Letter. See also Dechert
Letter; ABA Committee Letter (suggesting that we state on Form ADV
that the Advisers Act applies with respect to all U.S. clients of
every registered investment adviser, and with respect to all of the
activities of registered investment advisers that have their
principal place of business in the United States).
\226\ Certain commenters discussed our cross-border application
of the Advisers Act. ABA Committee Letter; Dechert Letter; Schulte
Letter. Most of the substantive provisions of the Advisers Act are
not applied to the non-U.S. clients of a non-U.S. adviser registered
with the Commission but non-U.S. advisers registered with the
Commission must comply with the Advisers Act and the Commission's
rules thereunder with respect to any U.S. clients (and any
prospective U.S. clients) they may have. See Proposing Release,
supra footnote 3 at n.57 and Exemptions Release, supra footnote 203
at Section II.D.
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Two commenters suggested permitting umbrella registration for an
organization where all of the advisers have their principal office and
place of business outside of the United States.\227\ However, umbrella
registration is intended to apply only where our staff has access to
and can readily examine the filing and relying advisers and where the
Advisers Act and the rules thereunder fully apply to all advisers (and
clients) under the umbrella registration.\228\ This would not be the
case for a group of non-U.S. advisers.
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\227\ Schulte Letter; Shearman Letter.
\228\ Proposing Release, supra footnote 3 at Section II.A.3.
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Several commenters\229\ argued that we should expand the concept of
umbrella registration by registered advisers to include ``umbrella
reporting'' by exempt reporting advisers. Many of these commenters
stated, and we acknowledge, that allowing exempt reporting advisers
that operate a single advisory business through multiple legal entities
to file an ``umbrella report'' would provide many of the same benefits
as umbrella registration.\230\ However, we are not expanding the
concept of umbrella registration to include ``umbrella reporting'' by
exempt reporting advisers at this time. Some of the conditions required
for umbrella registration reflect certain requirements that apply only
to registered advisers.\231\ Different conditions might be more
appropriate for ensuring that a group of exempt reporting advisers is
operating a single advisory business and therefore should be able to
take advantage of ``umbrella reporting.''
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\229\ ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter;
MFA Letter; NYSBA Committee Letter; SBIA Letter; Schulte Letter;
Shearman Letter.
\230\ ABA Committee Letter; AIMA Letter; MFA Letter; SBIA
Letter; Schulte Letter. See also ACG Letter.
\231\ Specifically, exempt reporting advisers are not subject to
the requirement for compliance policies and procedures pursuant to
rule 206(4)-7 under the Advisers Act or for a code of ethics
pursuant to rule 204A-1 under the Advisers Act. See ACG Letter.
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Certain commenters questioned the status of a set of Frequently
Asked Questions \232\ that permits certain exempt reporting advisers to
file a single Form ADV on behalf of multiple special purpose
entities.\233\ The views of the staff as expressed in these Frequently
Asked Questions are not withdrawn as a result of today's amendments to
Form ADV.
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\232\ Frequently Asked Questions on Form ADV and IARD, Reporting
to the SEC as an Exempt Reporting Adviser (Mar. 2012), available at
https://www.sec.gov/divisions/investment/iard/iardfaq.shtml#exemptreportingadviser.
\233\ ABA Committee Letter; AIMA Letter; NYSBA Committee Letter.
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Two commenters disagreed with Condition 5's requirement that the
filing adviser and each relying adviser operate under a single code of
ethics adopted in accordance with rule 204A-1 under the Advisers Act
and a single set of written policies and procedures adopted and
implemented in accordance with rule 206(4)-(7) under the Advisers Act
and administered by a single chief compliance officer in accordance
with that rule.\234\ One commenter argued that Condition 5 was too
restrictive and suggested that we allow groups of related advisers with
``substantially similar'' codes of ethics and sets of policies and
procedures administered by several chief compliance officers operating
under a ``common compliance regime'' to file an umbrella
registration.\235\ Based on our experience with private fund advisers
that operate a single private fund advisory business through multiple
legal entities, we believe that they commonly have a unified compliance
program which is characterized by a single code of ethics and a single
set of compliance policies and procedures administered by a single
chief compliance officer. Because we believe that the existence of a
unified compliance program that meets the requirements of Condition 5
is a meaningful indicia of a single private fund advisory business, we
are not modifying Condition 5 at this time.
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\234\ Capital Research Letter. See ACG Letter (stating that
Condition 5 would have the practical effect of excluding exempt
reporting advisers from eligibility for umbrella registration
because exempt reporting advisers are not required by Advisers Act
rule 204A-1 to adopt a code of ethics, nor are they required by
Advisers Act rule 206(4)-7 to adopt compliance policies and
procedures).
\235\ Capital Research Letter.
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Several commenters disagreed with limiting umbrella registration
eligibility to advisers operating a single private fund advisory
business as described in Condition 1.\236\ Some commenters urged the
Commission to make umbrella registration available where the advisers
operate a single advisory business for types of clients other than
those described in Condition 1, including registered investment
companies and business development companies.\237\ Another commenter
disagreed with limiting eligibility to a single advisory business of
any kind and suggested that umbrella registration apply to all related
persons of a filing adviser.\238\ However, as we stated in the
Proposing Release, we do not believe umbrella registration is
appropriate for advisers that are related but that operate separate
advisory businesses as it would compromise data quality and complicate
analyses that rely on data from Form ADV.\239\ We believe that by
adopting umbrella registration as proposed, we are best able to
accommodate the unique needs of
[[Page 60436]]
private fund advisers that operate a single advisory business through
multiple legal entities without compromising the data quality or
analyses that rely on data from Form ADV.
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\236\ ASG Letter; BlackRock Letter; Capital Research Letter;
Dechert Letter; Comment Letter of Tannenbaum Helpern Syracuse &
Hirschtritt LLP (Aug. 5, 2016) (``Tannenbaum Letter'') (disagreed
with ``substantially similar or otherwise related'' language,
because advisers may operate a single business with different
investment strategies).
\237\ ASG Letter; Dechert Letter. See also BlackRock Letter.
\238\ Capital Research Letter.
\239\ Proposing Release, supra footnote 3 at Section II.A.3.
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Several commenters took issue with the proposal's requirement to
determine asset-based eligibility for umbrella registration on an
entity-by-entity, rather than consolidated, basis.\240\ These
commenters suggested that the goals of providing a clearer picture of
groups of related advisers that operate as a single business and
establishing a more efficient method for registration for separate
legal entities that collectively conduct a single advisory business
would be better served by allowing the group to determine asset-based
eligibility for umbrella registration on a consolidated basis.\241\
Umbrella registration was intended to consolidate the multiple
registration forms that may otherwise have been required by a single
advisory business. It was not intended to alter or modify the
eligibility for registration with the Commission.\242\
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\240\ Dechert Letter; Morgan Letter; NRS Letter; NYSBA Committee
Letter. See MFA Letter (arguing that a registered private fund
adviser that serves as a filing adviser should be able to add a
relying adviser that is an exempt reporting adviser to its umbrella
registration).
\241\ Id.
\242\ See Proposing Release, supra footnote 3 at Section II.A.3.
To the extent there is concern about the eligibility of SEC
registration for newly-formed relying advisers, rule 203A-2(c)
provides an exemption for advisers that expect to be eligible for
Commission registration within 120 days.
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Some commenters disagreed with the requirement contained in
Condition 1 that separately managed accounts be owned by qualified
clients.\243\ One commenter stated that the qualified client
requirement for separately managed accounts is not related to the
single business requirement.\244\ Condition 1 also requires that the
qualified clients be otherwise eligible to invest in the private funds
advised by the filing adviser or a relying adviser and that their
accounts pursue investment objectives and strategies that are
substantially similar or otherwise related to those private funds.
Condition 1, including the qualified client requirement, is intended to
ensure the commonality of clients that we believe is an important
indicia of a single private fund advisory business. For example, if a
group of advisers advised private funds as well as separately managed
accounts held by non-qualified clients or separately managed accounts
that pursue investment objectives or strategies that differ from the
private funds they advise, we do not believe they would be operating a
single private fund advisory business. The offering of separately
managed accounts to clients other than qualified clients (such as
retail clients) or separately managed accounts that pursue investment
objectives or strategies that differ from the private funds they advise
indicate that the group of advisers is engaged in lines of business
that differ from a single private fund advisory business that we intend
to cover with umbrella registration. Accordingly, at this time, we
continue to believe that a group of advisers' ability to comply with
Condition 1, including the qualified client requirement for separately
managed accounts, is a meaningful indicia of a single private fund
advisory business, and we are therefore adopting Condition 1 as
proposed.
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\243\ Morgan Letter; NYSBA Committee Letter; Tannenbaum Letter.
See also PCA Letter.
\244\ NYSBA Committee Letter.
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We also received several comments on the new amendments to Form ADV
to accommodate umbrella registration. Two commenters generally
supported the benefits of new Schedule R, which requires separate
reporting of indirect and direct ownership for relying advisers
(similar to current Schedules A and B of Form ADV).\245\ One commenter
was concerned that relying advisers, which may act as special purpose
general partners or similar entities and may be owned by employees
sharing in the performance-based compensation paid by the fund, would
in effect be forced to share the details of employee compensation on a
public filing.\246\ The ownership information required of relying
advisers is consistent with the ownership information required of
filing advisers. We believe this information will more accurately
reflect the full nature and scope of the single advisory business
conducted by the group of related advisers and will be more informative
for advisory clients and private fund investors as well as the
Commission.\247\
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\245\ ASG Letter; PEGCC Letter.
\246\ Shearman Letter.
\247\ See Proposing Release, supra footnote 3 at Section II.A.3.
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4. Clarifying, Technical and Other Amendments to Form ADV
We are adopting, largely as proposed, several amendments to Form
ADV that are designed to clarify the form and its instructions. As
noted in the Proposing Release, we believe these amendments to Form ADV
will make the filing process clearer and more efficient for advisers
and increase the reliability and the consistency of information
provided by investment advisers. More reliable and consistent
information will improve our staff's ability to interpret, understand,
and place in context the information provided by advisers, allow our
staff to make comparisons across investment advisers and improve the
risk assessment and examination program. Many of these amendments are
derived from questions frequently received by our staff. Except where
noted, we did not receive comments on these amendments.
a. Amendments to Item 2
Item 2.A. of Part 1A of Form ADV requires an adviser to select the
basis upon which it is eligible to register with the Commission, and
Item 2.A.(9) includes as a basis that the adviser is eligible for
registration because it is a ``newly formed adviser'' relying on rule
203A-2(c) because it expects to be eligible for SEC registration within
120 days.\248\ Section 2.A.(9) of Schedule D is entitled ``Newly Formed
Adviser'' and requests the adviser to make certain representations. As
noted in the Proposing Release, our staff has received questions about
whether the exemption from the prohibition on Commission registration
contained in rule 203A-2(c) under the Advisers Act applies only to
entities that have been ``newly formed,'' i.e., newly created as
corporate or other legal entities. It does not only apply to newly
created entities and therefore, as proposed, we are deleting the phrase
``newly formed adviser'' from Item 2.A.(9) and Section 2.A.(9) of
Schedule D. Section 2.A.(9) will be renamed ``Investment Adviser
Expecting to be Eligible for Commission Registration within 120 Days.''
\249\
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\248\ Form ADV, Part 1A, Item 2.A.(9) and Section 2.A.(9) of
Schedule D.
\249\ Amended Form ADV, Part 1A, Item 2.A.(9); see rule 203A-
2(c) under the Advisers Act.
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b. Amendments to Item 4
Item 4 of Part 1A of Form ADV addresses successions of investment
advisers, and the Instructions to Item 4 provide that a new
organization has been created under certain circumstances, including if
the adviser has changed its structure or legal status (e.g., form of
organization or state of incorporation). As noted in the Proposing
Release, our staff frequently receives questions from investment
advisers regarding this item and, as proposed, we are adding to Item 4
and Section 4 of Schedule D text that is currently contained in the
Instructions to Item 4 that succeeding to the business of a registered
investment adviser includes, for example, a change of
[[Page 60437]]
structure or legal status (e.g., form of organization or state of
incorporation).\250\
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\250\ Amended Form ADV, Part 1A, Item 4.A. and Section 4 of
Schedule D.
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c. Amendments to Item 7
Item 7 of Part 1A of Form ADV and corresponding sections of
Schedule D require advisers to report information about their financial
industry affiliations and the private funds they advise. We are
adopting several technical amendments to Item 7. As proposed, we are
revising Item 7.A., which requires advisers to check whether their
related persons are within certain categories of the financial
industry, to clarify that advisers should not disclose in response to
this item that some of their employees perform investment advisory
functions or are registered representatives of a broker-dealer, because
this information is required to be reported on Items 5.B.(1) and
5.B.(2) of Part 1A, respectively. Items 5.B.(1) and 5.B.(2) request
information about an adviser's employees. Adding this text to Form ADV
should assist filers in filling out the form as well as provide more
accurate data to us and the general public.\251\
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\251\ Amended Form ADV, Part 1A, Item 7. The staff has provided
this clarification and it is currently available online at our
staff's Frequently Asked Questions on Form ADV and IARD, available
at http://www.sec.gov/divisions/investment/iard/iardfaq.shtml.
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Item 7.B. of Part 1A of Form ADV asks whether the adviser serves as
adviser to any private fund. Section 7.B.(1) of Schedule D requires
advisers to provide information about the private funds they manage. We
are adding text to Item 7.B. clarifying that Section 7.B.(1) of
Schedule D should not be completed if another SEC-registered adviser or
SEC exempt reporting adviser reports the information required by
Section 7.B.(1) of Schedule D. Currently the instructions only refer to
another adviser. We are also adopting, as proposed, several amendments
to Section 7.B.(1) of Schedule D. Question 8 of Section 7.B.(1)
currently asks whether the private fund is a ``fund of funds,'' and if
it is, whether the private fund invests in funds managed by the adviser
or a related person of the adviser. Below those two questions there is
a note informing advisers when they should answer yes to the first
question regarding whether the private fund is a ``fund of funds.'' We
are moving the note to directly after Question 8.(a).\252\ We believe
this change will assist filers in answering Question 8.
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\252\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Questions 8.(a)-(b).
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Question 10 of Section 7.B.(1) of Schedule D asks the adviser to
identify the category of the private fund. As proposed, we are deleting
text in Question 10 that directs advisers to refer to the underlying
funds of a fund of funds when selecting the type of fund, in order to
reconcile differences with Form PF, which permits advisers to disregard
any private fund's equity investments in other private funds.\253\
Question 19 of Section 7.B.(1) of Schedule D asks whether the adviser's
clients are solicited to invest in the private fund. We are adding text
to Question 19, as proposed, to make clear that the adviser should not
consider feeder funds as clients of the adviser to a private fund when
answering whether the adviser's clients are solicited to invest in the
private fund.\254\ As noted in the Proposing Release, this is a common
question that our staff receives and the intent of Question 19 is not
to capture affiliated feeder funds. Question 21 of Section 7.B.(1) of
Schedule D asks whether the private fund relies on an exemption from
registration of its securities under Regulation D of the Securities Act
of 1933 and Question 22 asks for the private fund's Form D file number.
We are adopting a clarifying revision to Question 21 as proposed to ask
if the private fund has ever relied on an exemption from registration
of its securities under Regulation D, in order to better reflect the
intention of the Question.\255\ The current Question 21, if answered in
the negative, would not require the adviser to provide the private
fund's Form D file number in Question 22, meaning we would not receive
Form D file numbers in the event there was past reliance on Regulation
D.\256\
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\253\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 10. See Form PF, General Instruction 7.
\254\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 19.
\255\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 21.
\256\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
21.
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We are adopting revisions to Question 23.(a)(2) as proposed.
Currently, this question requires an adviser to check a box to indicate
whether the private fund's financial statements are prepared in
accordance with U.S. generally accepted accounting principles
(``GAAP'').\257\ We are adding text instructing advisers that they are
required to answer Question 23.(a)(2) only if they answer ``yes'' to
Question 23.(a)(1), which asks whether the private fund's financial
statements are subject to an annual audit.\258\ This revision will
clarify when an adviser is actually required to answer Question
23.(a)(2). We are also revising Question 23.(g) as proposed. The
question currently asks whether the private fund's audited financial
statements are distributed to the private fund's investors. We are
adding ``for the most recently completed fiscal year'' to clarify the
question. In addition, we are revising Question 23.(h) as proposed.
This question currently asks whether the report prepared by the
auditing firm contains an unqualified opinion.\259\ As noted in the
Proposing Release, this question has prompted questions from advisers
regarding which report and what timeframe the question refers to. To
clarify, we are revising the question, as proposed, to ask whether all
of the reports prepared by the auditing firm since the date of the
adviser's last annual updating amendment contain unqualified
opinions.\260\ Finally, as proposed, we are adding Question 25.(g),
which requests the legal entity identifier, if any, for a private fund
custodian that is not a broker-dealer, or that is a broker-dealer but
does not have an SEC registration number. The legal entity identifier
is a unique identifier associated with a single entity and is intended
to provide a uniform international standard for identifying parties to
financial transactions. Furthermore, the reporting of legal entity
identifier information on Form ADV facilitates the ability of investors
and the Commission to link the data reported with data from other
filings or sources that is reported elsewhere as legal entity
identifiers become more widely used by regulators and the financial
industry. This information will help our examination staff more readily
identify the use of particular custodians by private funds.
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\257\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
23.(a)(2).
\258\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23.(a)(2).
\259\ Form ADV, Part 1A, Section 7.B.(1) of Schedule D, Question
23.(h).
\260\ Amended Form ADV, Part 1A, Section 7.B.(1) of Schedule D,
Question 23.(h).
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d. Amendments to Item 8
Based on inquiries from filers, we are adopting the proposed
amendments to Item 8 with a modification to clarify that newly-formed
advisers should answer questions in the item based on the types of
participation and interest they expect to engage in during the next
year. In the Proposing Release, we did not specify that the instruction
was for newly-formed advisers, and commenters expressed concern that
the proposal
[[Page 60438]]
would make Item 8 the only section in Part 1A requesting forward-
looking information, and were concerned about the difficulty around
gauging the likelihood of future events and the possibility for ``false
positives.'' \261\ We agree and, as adopted here, we have updated the
Item to address commenters' concerns.
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\261\ See IAA Letter; Oppenheimer Letter; SIFMA Letter.
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Item 8.B.(2) of Part 1A of Form ADV currently asks whether the
adviser or any related person of the adviser recommends the purchase of
securities to advisory clients for which the adviser or any related
person of the adviser serves as underwriter, general or managing
partner, or purchaser representative.\262\ The current wording has
caused confusion regarding the treatment of purchaser representatives.
As proposed, we are rewording the question to ask whether the adviser
or any related person of the adviser recommends to advisory clients or
acts as a purchaser representative for advisory clients with respect to
the purchase of securities for which the adviser or any related person
of the adviser serves as underwriter or general or managing partner. As
noted in the Proposing Release, this edit is designed to clarify that
the question applies to any related person who recommends to advisory
clients or acts as a purchaser representative for advisory clients with
respect to the purchase of securities for which the adviser or any
related person of the adviser serves as underwriter or general or
managing partner.\263\
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\262\ Form ADV, Part 1A, Item 8.B.(2).
\263\ Amended Form ADV, Part 1A, Item 8.B.(2).
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Item 8.H. of Part 1A of Form ADV asks whether the adviser or any
related person of the adviser, directly or indirectly, compensates any
person for client referrals. We are revising Item 8.H. as proposed to
break the question into two parts to increase our understanding of
compensation for client referrals. Revised Item 8.H.(1) will cover
compensation to persons other than employees for client referrals.\264\
Revised Item 8.H.(2) will cover compensation to employees, in addition
to employees' regular salaries, for obtaining clients for the
firm.\265\ Item 8.I. asks whether the adviser or any related person of
the adviser directly or indirectly receives compensation from any
person other than the adviser or related person of the adviser for
client referrals. We are also adding text to Item 8.I., as proposed, to
clarify that advisers should not include the regular salary that the
adviser pays to an employee in responding to this item.\266\
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\264\ Amended Form ADV, Part 1A, Item 8.H.(1).
\265\ Amended Form ADV, Part 1A, Item 8.H.(2).
\266\ Amended Form ADV, Part 1A, Item 8.I.
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Two commenters thought that the proposed amendment to Item 8.H was
highly subjective and needed additional guidance.\267\ In addition, one
commenter suggested that Part 2B of Form ADV provided adequate
disclosure of employee compensation.\268\ While we appreciate these
comments, we are adopting these amendments as proposed. We continue to
believe Item 8.H and the accompanying instructions are sufficiently
clear and are appropriate to accommodate responses from and provide
flexibility to varying types of advisory businesses and compensation
arrangements. As noted in the Proposing Release, we are adopting these
amendments to Item 8.H to better understand how advisers compensate
both their staff and third parties for client referrals. The revisions
to this item do not change the scope of the information collected, but
instead provide more precise information about compensation for client
referrals.
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\267\ See MMI Letter (Item 8.H.(2) should be modified to conform
with Item 5 of Part 2B, where economic benefits for providing
advisory services are disclosed, but not regular salaries or
bonuses). See also PCA Letter.
\268\ JAG Letter.
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e. Amendments to Section 9.C. of Schedule D
Section 9.C. of Schedule D requests information about independent
public accountants that perform surprise examinations in connection
with the Advisers Act custody rule, rule 206(4)-2. We are adopting two
changes to Section 9.C. of Schedule D as proposed. First, we are adding
text requiring an adviser to provide the PCAOB-assigned number of the
adviser's independent public accountant. This will improve our staff's
ability to cross-reference information submitted through other systems
and evaluate compliance with the custody rule.\269\ Section 9.C.(6)
currently requires advisers to report whether any report prepared by an
independent public accountant that audited a pooled investment vehicle
or examined internal controls contained an unqualified opinion. We are
amending Section 9.C.(6) in a manner similar to Section 7.B.(1) of
Schedule D, Question 23.(h) as described above to provide clarity to
filers. Accordingly, the question will now ask whether all of the
reports prepared by the independent public accountant since the date of
the last annual updating amendment have contained unqualified
opinions.\270\
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\269\ Amended Form ADV, Part 1A, Section 9.C.(3) of Schedule D.
\270\ Amended Form ADV, Part 1A, Section 9.C.(6) of Schedule D.
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We received requests from multiple commenters to amend Item 9 of
Part 1A and Section 9.C. of Schedule D related to custody.\271\ We
appreciate commenters' suggestions, but these suggested amendments to
Item 9 or Section 9.C. are outside the scope of this rulemaking and we
are not amending them at this time.
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\271\ See ASG Letter; Comment Letter of Pat Hyman (June 11,
2015) (``Hyman Letter''); IAA Letter; PCA Letter and Schwab & Co.
Letter.
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f. Amendments to Disclosure Reporting Pages
Item 11 of Part 1A of Form ADV requires registered advisers and
exempt reporting advisers to provide information about their
disciplinary history and the disciplinary history of their advisory
affiliates. Those advisers who report an event for purposes of Item 11
are directed to complete a Disclosure Reporting Page (``DRP'') to
provide the details of the event. DRPs can be removed from Form ADV
under certain circumstances, including when ``the adviser is registered
or applying for registration with the SEC and the event was resolved in
the adviser's or advisory affiliate's favor.'' \272\ As proposed, we
are amending this text in each DRP to add ``or reporting as an exempt
reporting adviser with the SEC'' after ``applying for registration with
the SEC'' to clarify that both registered and exempt reporting advisers
may remove a DRP from their Form ADV record if a criminal, regulatory
or civil judicial action was resolved in the adviser's (or advisory
affiliate's) favor.\273\ As discussed in the Proposing Release, these
amendments will make disciplinary reporting uniform across registered
and exempt reporting advisers, consistent with requiring exempt
reporting advisers to report disciplinary events on Form ADV.
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\272\ Form ADV, Part 1A, Criminal, Regulatory Action and Civil
Judicial Action Disclosure Reporting Pages.
\273\ Amended Form ADV, Part 1A, Criminal, Regulatory Action and
Civil Judicial Action Disclosure Reporting Pages.
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g. Amendments to Instructions and Glossary
Together with the amendments to Part 1A, we are also adopting, as
proposed, conforming amendments to the General Instructions and the
Glossary for Form ADV. As discussed above, we are amending the General
Instructions to include instructions regarding umbrella registration.
As proposed, we are also removing outdated references to
[[Page 60439]]
``Special One-Time Dodd-Frank Transition Filing for SEC Registered
Advisers'' and ``recent'' amendments to Form ADV Part 2 that are no
longer needed. We retained one sentence from those instructions that
specifies that every application for registration must include a
narrative brochure prepared in accordance with the requirements of Part
2A of Form ADV.\274\ We also added clarifying language that exempt
reporting advisers submitting other than annual amendments should
update corresponding sections of Schedules A, B, C and D,\275\ and
provided updated mailing instructions for FINRA.\276\ In the glossary,
we are updating the definition of ``Legal Entity Identifier'' to
reflect recent advancements in this protocol.\277\
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\274\ Amended Form ADV, General Instructions, Instruction 3.
\275\ Amended Form ADV, General Instructions, Instruction 4.
\276\ Amended Form ADV, General Instructions, Instruction 9.
\277\ The definition of Legal Entity Identifier is: A ``legal
entity identifier'' assigned by a utility endorsed by the Global LEI
Regulatory Oversight Committee (ROC) or accredited by the Global LEI
Foundation (GLEIF). See Amended Form ADV, Glossary. In Item 1.P., we
are removing outdated text referring to the ``legal entity
identifier'' as being ``in development'' in the first half of 2011.
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Where applicable, we are making technical revisions, as proposed,
to specify that an adviser must ``apply for registration'' (rather than
simply ``register'') to more accurately reflect the rule text. As
proposed, we are also deleting text in the instructions related to Item
1.O. because this text is going to appear directly in the corresponding
section of Part 1 of Form ADV. We are adding text clarifying that a
change in information related to Item 1.O. does not necessitate a
prompt other-than-annual amendment (as changes to Item 1 otherwise do).
We have also received numerous comment letters recommending
additional amendments to clarify other sections of Form ADV.\278\ While
we appreciate commenters raising their concerns with us, these
suggested recommendations are outside the scope of this rulemaking and
we decline to take action to further modify Form ADV based on these
comments.
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\278\ See, e.g., ASG Letter (Items 6 and 7); JGAS Letter; PCA
Letter (Item 8); NYSBA Committee Letter (Items 5 and 8 and Schedule
D); PCA Letter (Items 5 and 8); T. Rowe Price Letter (definition of
``regulatory assets under management'' in subadvisory arrangements).
BlackRock also recommended we use XML format for Form ADV filings.
See BlackRock Letter.
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B. Amendments to Investment Advisers Act Rules
1. Amendments to Books and Records Rule
We are adopting two amendments to the Advisers Act books and
records rule, rule 204-2, largely as proposed, that will require
advisers to maintain additional materials related to the calculation
and distribution of performance information.
Rule 204-2(a)(16) currently requires advisers that are registered
or required to be registered with us to maintain records supporting
performance claims in communications that are distributed or circulated
to ten or more persons.\279\ Consistent with the proposal, we are
amending rule 204-2(a)(16) by removing the ten or more persons
condition and replacing it with ``any person.'' Accordingly, under the
amended rule, advisers will be required to maintain the materials
listed in rule 204-2(a)(16) that demonstrate the calculation of the
performance or rate of return in any communication that the adviser
circulates or distributes, directly or indirectly, to any person.
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\279\ Rule 204-2(a)(16) requires advisers to make and keep ``All
accounts, books, internal working papers, and any other records or
documents that are necessary to form the basis for or demonstrate
the calculation of the performance or rate of return of any or all
managed accounts or securities recommendations in any notice,
circular, advertisement, newspaper article, investment letter,
bulletin or other communication that the investment adviser
circulates or distributes, directly or indirectly, to 10 or more
persons (other than persons connected with such investment adviser);
provided, however, that, with respect to the performance of managed
accounts, ``the retention of all account statements, if they reflect
all debits, credits, and other transactions in a client's account
for the period of the statement, and all worksheets necessary to
demonstrate the calculation of the performance or rate of return of
all managed accounts shall be deemed to satisfy the requirements of
this paragraph.''
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We are also adopting amendments to rule 204-2(a)(7). Rule 204-
2(a)(7) currently requires advisers that are registered or required to
be registered with us to maintain certain categories of written
communications received and copies of written communications sent by
such advisers.\280\ Consistent with the proposal, we are amending rule
204-2(a)(7) to require advisers to also maintain originals of all
written communications received and copies of written communications
sent by an investment adviser relating to the performance or rate of
return of any or all managed accounts or securities recommendations.
---------------------------------------------------------------------------
\280\ Rule 204-2(a)(7) requires advisers to make and keep:
``Originals of all written communications received and copies of all
written communications sent by such investment adviser relating to
(i) any recommendation made or proposed to be made and any advice
given or proposed to be given, (ii) any receipt, disbursement or
delivery of funds or securities, or (iii) the placing or execution
of any order to purchase or sell any security.''
---------------------------------------------------------------------------
Several commenters expressed general support for the proposed
amendments to the books and records rule,\281\ while other commenters
felt the proposed amendments would be unnecessary and a significant
burden on advisers.\282\ Several commenters also suggested the proposed
amendments be modified to exclude one-on-one communications that are
customized responses from investors or communications with
sophisticated investors or clients.\283\ In addition, two commenters
raised concerns about the applicability of the amendments to rule 204-2
to performance information that predated the effective date of the
amendments.\284\
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\281\ See, e.g., ABA Committee Letter; CFA Letter; LPL Letter
(supporting the proposed amendments to rule 204-2(a)(7) but
suggesting an exception to rule 204-2(a)(16) for communications
addressed to a single client regarding that client's particular
account or security in the account); NASAA Letter; PCA Letter
(finding the proposed rule change sufficient but expressing concern
with the Commission linking the requirement to maintain records
pertaining to calculation of individual client account performance
history, which are communications and not advertising, to the
enforcement of rule 206(4)-1); Comment Letter of Wells Fargo Funds
Management, LLC (Aug. 11, 2015) (``Wells Fargo Letter'').
\282\ See, e.g., ACG Letter; Anonymous Letter (citing specific
costs of increased training needed to implement and possible
software updates); ASG Letter (asserting the amended requirement is
burdensome because advisers do not always maintain copies of
individual performance provided on an ad hoc basis); PEGCC Letter
(stating the Commission significantly understates the burden of
complying with the proposed amendments); SBIA Letter (noting that
while the amendments themselves are not burdensome, when they are
aggregated with other recordkeeping obligations, they could lead to
overall compliance burdens for smaller advisers); Schnase Letter
(advisers may find it difficult to discern whether particular
materials are subject to the rule). One commenter suggested that the
amendments to rule 204-2(a)(7) are not necessary because other
recordkeeping provisions already require advisers to maintain those
records. See IAA Letter.
\283\ PEGCC Letter. See also Comment Letter of Michael D. Berlin
(June 8, 2015) (``Berlin Letter''); LPL Letter.
\284\ See Comment Letter of Arnstein & Lehr LLP (Dec. 3, 2015);
NRS Letter.
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Based on a comment we received,\285\ we are making one non-
substantive modification to the proposed amendments. To clarify and
avoid confusion, we are adding the new subsection (iv) of rule 204-
2(a)(7) immediately following subsection (iii) of the rule and
preceding the proviso regarding unsolicited market letters and
[[Page 60440]]
records of names and addresses of persons to whom an adviser sent
particular items. A commenter noted that this placement of the new
subsection raised questions about whether the proviso also applied to
new subsection (iv). The proviso does apply to new subsection (iv) and
we believe that, by moving subsection (iv) to immediately after
subsection (iii) and before the proviso, we have addressed the
commenter's concern.
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\285\ See IAA Letter (noting that the new subsection (iv) of
rule 204-2(a)(7), as it currently appears, is unclear on whether an
adviser would be required to maintain records relating to
unsolicited market letters or other communications discussing the
performance of securities that the adviser recommended to its
clients).
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We are adopting the rest of the amendments to rule 204-2 as
proposed. While we appreciate the concerns raised by commenters, we
continue to believe the veracity of performance information is
important regardless of whether it is a personalized client
communication or in an advertisement sent to ten or more persons. As
noted in the Proposing Release, a recent enforcement action
demonstrated to us the disadvantages of not requiring investment
advisers to maintain records forming the basis of performance
calculations or performance communications sent to individuals.\286\
Moreover, it has been our staff's experience that investment advisers
routinely make and preserve communications containing performance
information and records to support the performance claims. Based on our
staff's experience and the confirmation of several commenters, we
believe that most advisers already maintain this information.\287\
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\286\ In the Matter of Michael R. Pelosi, Investment Advisers
Act Release No. 3141 (Jan. 14, 2011); Initial Decision Release No.
448 (Jan. 5, 2012); Investment Advisers Act Release No. 3805 (Mar.
27, 2014) (Commission opinion dismissing proceeding against
associated person of registered investment adviser charged with
providing false and misleading performance information because the
record lacked an evidentiary basis from which to determine that the
performance information was materially false or misleading).
\287\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA
Letter. See also IAA Letter.
---------------------------------------------------------------------------
We believe these records will be useful in examining and evaluating
adviser performance claims. Investors will benefit to the extent that
the amendments reduce the incidence of misleading or fraudulent
advertising and communications. For these reasons, we are adopting the
amendments to the Adviser Act books and records rule, rule 204-2, as
proposed.
These amendments will apply to communications circulated or
distributed after the compliance date of amended rule 204-2. Advisers
that circulate or distribute communications after the compliance date
that include performance information, including information on
performance that predates the effective date of these amendments, will
be required to maintain materials listed in rule 204-2(a)(16) that
demonstrate the calculation of the performance.\288\
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\288\ We note that to the extent this information was previously
or is currently included in an advertisement, the adviser is already
required to maintain the information under rule 204-2(a)(16).
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2. Technical Amendments to Advisers Act Rules
We are adopting the proposed technical amendments to several rules
under the Advisers Act and withdrawing transition rule 203A-5 under the
Advisers Act. Consistent with the proposal, we are removing transition
provisions from rules where the transition process is complete. Three
of the provisions were added as part of the implementation of the Dodd-
Frank Act. Two of the provisions were added when we amended Form ADV
and several Advisers Act rules to require advisers to electronically
file their brochures with the Commission. One commenter specifically
supported removal of the transition provisions.\289\
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\289\ See NRS Letter.
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a. Rule 203A-5
The Dodd-Frank Act amended section 203A of the Advisers Act to
prohibit from SEC registration ``mid-sized'' advisers that generally
have assets under management of between $25 million and $100
million.\290\ Rule 203A-5 provided a temporary exemption from the
prohibition on registration for mid-sized advisers to facilitate their
transition to state registration.\291\ As proposed, we are withdrawing
rule 203A-5 because the transition of mid-sized advisers from SEC to
state registration was completed in June 2012.
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\290\ See Section 410 of the Dodd-Frank Act.
\291\ See Implementing Release, supra footnote 133.
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b. Rule 202(a)(11)(G)-1(e)
Section 409 of the Dodd-Frank Act created a new exclusion from the
definition of ``investment adviser'' in section 202(a)(11)(G) of the
Advisers Act for family offices. The Commission adopted rule
202(a)(11)(G)-1 \292\ defining a family office and provided two
extended transition periods for family offices with certain charitable
organization clients and family offices relying on the rescinded
``private adviser'' exemption.\293\ As proposed, we are removing
paragraph (e) of rule 202(a)(11)(G)-1 because subparagraph (1) of the
transition provisions provided for by it expired on December 31, 2013,
and subparagraph (2) expired on March 30, 2012.
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\292\ Family Offices, Investment Advisers Act Release No. 3220
(June 22, 2011) [76 FR 37983 (June 29, 2011)].
\293\ Section 203(b)(3) of the Advisers Act as in effect before
Jul. 21, 2011, repealed by section 403 of the Dodd-Frank Act.
---------------------------------------------------------------------------
c. Rule 203-1(e)
Rule 203-1 outlines the procedures for advisers to register with
the Commission. Paragraph (e) of the rule was added as part of the
implementation of the Dodd-Frank Act and allowed companies that were
relying on the rescinded ``private adviser'' exemption \294\ to remain
exempt from registration until March 30, 2012 under certain
conditions.\295\ As proposed, we are removing paragraph (e) from Rule
203-1 because the transition for private advisers is now complete.
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\294\ Id.
\295\ See Implementing Release, supra footnote 133. The rule
203-1(e) exemption from registration requires not only reliance on
the former private adviser exemption but also that an adviser have
fifteen or fewer clients in the preceding twelve months and neither
hold itself out to the public as an investment adviser nor act as an
investment adviser to a registered investment company or business
development company.
---------------------------------------------------------------------------
d. Rule 203-1(b), Rule 204-1(c) and Rule 204-3(g)
Rule 203-1 and Rule 204-1 were amended in 2010 to provide
transition periods for advisers to file narrative brochures required by
Part 2A of Form ADV electronically with the Investment Adviser
Registration Depository (``IARD'').\296\ Rule 203-1(b), entitled
``transition to electronic filing,'' requires investment advisers
applying for registration after January 1, 2011 to file their brochures
electronically unless they receive a continuing hardship
exemption.\297\ Rule 204-1(c) requires investment advisers that are
required to file a brochure and had a fiscal year that ended on or
after December 31, 2010 to electronically file a Part 2A brochure as
part of their next annual updating amendment. As proposed, we are
removing paragraph (b) from rule 203-1 and paragraph (c) from rule 204-
1 because the transition to electronic filing is now complete.\298\ We
also are making a technical, conforming additional change by removing
rule 204-3(g) because it refers to the transition provision in rule
204-1(c).\299\
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\296\ Amendments to Form ADV, Investment Advisers Act Release
No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)].
\297\ The continuing hardship exemption under rule 203-3 will
not be withdrawn by these technical amendments.
\298\ Current paragraphs (c) and (d) of Rule 203-1 are
redesignated as (b) and (c) and current paragraphs (d) and (e) of
Rule 204-1 are redesignated as (c) and (d).
\299\ Current paragraph (h) of Rule 204-3 is redesignated as
(g).
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[[Page 60441]]
III. Effective and Compliance Dates
A. Effective Date
The effective date of the amendments to rules 204-2, 202(a)(11)(G)-
1, 203-1, 204-1 and 204-3, and the amendments to Form ADV is October
31, 2016. Rule 203A-5 is removed effective October 31, 2016.
B. Compliance Dates
1. Amendments to Form ADV
Several commenters requested a compliance date of at least one year
after adoption.\300\ Any adviser filing an initial Form ADV or an
amendment to an existing Form ADV on or after October 1, 2017 will be
required to provide responses to the form revisions we are adopting
today. Our staff is working closely with FINRA to re-program IARD and
we understand that the system is expected to be able to accept filings
of revised Form ADV by October 1, 2017. This date is over one year from
adoption. In addition, most advisers will not be filing their annual
updating amendment until the first quarter of 2018, and therefore we
believe this compliance period is appropriate.
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\300\ See Anonymous Letter; Capital Research Letter; Dechert
Letter; IAA Letter; MMI Letter; SIFMA Letter.
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2. Amendments to Investment Advisers Act Rules
Our amendments to the books and records rule, 275.204-2, will apply
to communications circulated or distributed after October 1, 2017. As
discussed in Section II.B.(1), advisers that circulate or distribute
communications after October 1, 2017 that include performance
information, including information on performance that predates that
date, will be required to maintain the materials listed in 275.204-
2(a)(16) that demonstrate the calculation of the performance.
IV. Economic Analysis
A. Introduction
We are sensitive to the benefits and costs imposed by our rules and
understand that there will be costs associated with complying with the
amendments. The following economic analysis identifies and considers
the benefits and costs--including the effects on efficiency,
competition, and capital formation--that will result from the
amendments to Form ADV and the amendments to and rescission of certain
rules under the Investment Advisers Act. The economic effects
considered in adopting the amendments are discussed below.
We are adopting amendments to Form ADV and the Advisers Act books
and records rule 204-2, and technical amendments to several other rules
under the Advisers Act. In summary, and as discussed in greater detail
in Section II. above, we are adopting the following amendments to Form
ADV and Advisers Act rules:
Amendments to Form ADV designed to fill certain data gaps
and enhance current reporting provided by investment advisers in order
to improve the depth and quality of the information we collect on
investment advisers and to facilitate our risk monitoring objectives;
Amendments to Form ADV to incorporate ``umbrella
registration'' for private fund advisers;
Clarifying, technical and other amendments to Part 1A of
Form ADV;
Amendments to the Advisers Act books and records rule to
require advisers to make and keep supporting documentation that
demonstrates performance calculations or rates of return in any written
communications that the investment adviser circulates or distributes;
and
Technical amendments to several rules under the Advisers
Act to remove transition provisions that are no longer necessary.
As discussed in the Proposing Release, we rely on information
reported by investment advisers on Form ADV to monitor trends, assess
emerging risks, inform policy choices and rulemaking, and assist our
staff in examination and enforcement efforts.\301\ We believe that the
amendments to Form ADV will improve the information provided by
investment advisers to the Commission, clients and prospective clients,
and may improve investor protection by informing policy choices and
focusing examination activities. We also believe that the amendments to
the Advisers Act books and records rule may improve investor
protections by providing useful information to our examination and
enforcement staff in evaluating advisers' performance claims. While, as
stated above, we believe that most that can rely on umbrella
registration are doing so, incorporating umbrella registration into
Form ADV will make the existence of umbrella registration more widely
known to advisers, which may result in more eligible advisers taking
advantage of the opportunity to umbrella register. This could, make
filing ADV more efficient for such advisers, reducing their filing
costs. In addition, we believe that incorporating umbrella registration
into Form ADV will benefit the Commission, clients and prospective
clients by improving the consistency and quality of the information
that private fund advisers disclose about their business.
---------------------------------------------------------------------------
\301\ Proposing Release, supra footnote 3 at Section III.A.
---------------------------------------------------------------------------
The regulatory regime as it exists today for investment advisers
serves as the economic baseline against which the costs and benefits,
as well as the impact on efficiency, competition, and capital formation
of the amendments are discussed. The baseline includes the current
requirement for investment advisers to file Form ADV, the staff
guidance regarding a filing adviser filing a single Form ADV on behalf
of itself and each relying adviser,\302\ the current requirements for
investment advisers to maintain books and records, and other current
rules under the Advisers Act. The parties that will be affected by the
amendments are: investment advisers that file Form ADV, including
private fund advisers that rely on, or will rely on, umbrella
registration, and investment advisers that currently manage, or will
manage, separately managed accounts; the Commission; current and future
advisory clients; and other current and future users of investment
adviser information reported on Form ADV, including third-party
information providers.
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\302\ See 2012 ABA Letter, supra footnote 5.
---------------------------------------------------------------------------
Based on IARD system data as of May 16, 2016, approximately 12,024
investment advisers are registered with the Commission, and 3,248
exempt reporting advisers file reports with the Commission.
Approximately 8,718 investment advisers registered with the Commission
(73%) reported assets under management attributable to separately
managed account clients. Of those 8,718 advisers, approximately 2,538
advisers reported regulatory assets under management attributable to
separately managed account clients of at least $500 million and less
than $10 billion and approximately 545 advisers reported regulatory
assets under management attributable to separately managed account
clients of at least $10 billion.\303\ Advisers with at least $10
billion in regulatory assets under management attributable to
separately managed accounts will be subject to
[[Page 60442]]
additional reporting on separately managed accounts on Form ADV.
Approximately 743 registered advisers to private funds currently submit
a single Form ADV on behalf of themselves and 2,587 relying advisers,
relying on the 2012 ABA Letter. All investment advisers registered or
required to be registered with the Commission are subject to the
Advisers Act books and records rule.
---------------------------------------------------------------------------
\303\ Based on IARD system data as of May 16, 2016. These
estimates are approximations because Form ADV currently collects
information about assets under management by client type and the
number of clients of each type in broad ranges. Item 5.D.(1)-(3)
will require advisers to specify their assets under management and
number of clients by client type, which will benefit our ability to
understand and oversee the investment advisers that advise these
accounts and recognize potential risks.
---------------------------------------------------------------------------
As we explained in the Proposing Release, we have sought, where
possible, to quantify the costs, benefits, and effects on efficiency,
competition, and capital formation expected to result from the
amendments to Form ADV and Investment Advisers Act rules, and
reasonable alternatives.\304\ In many cases, however, we are unable to
quantify the economic effects because we lack the information necessary
to provide reasonable estimates. The economic effects of the amendments
also depend upon a number of factors which we often cannot estimate.
Examples include the extent to which investor protection and our
ability to oversee investment advisers will improve, and the extent to
which investors will utilize the information in Form ADV to choose or
retain an investment adviser. Therefore, some of the discussion below
is qualitative in nature. Several commenters raised concerns about the
burdens and costs associated with these amendments, and in some cases
suggested that our quantitative estimates in the Proposing Release
underestimated these costs. We describe their comments below, and have
modified certain provisions in response to the comments.
---------------------------------------------------------------------------
\304\ Proposing Release, supra footnote 3 at Section III.A.
---------------------------------------------------------------------------
B. Amendments to Form ADV
Certain amendments to Form ADV are designed to address potential
gaps in information, such as information about advisers' separately
managed accounts, and obtain additional information on areas such as
social media, additional offices, foreign clients, and wrap fee
accounts. We believe this information will improve the depth and
quality of information that we collect on investment advisers, which
will assist the Commission in our oversight activities and clients and
potential clients in assessing advisers.\305\ We also are adopting
amendments to Form ADV to establish a more efficient method for
multiple private fund adviser entities operating a single advisory
business to register with us using a single Form ADV. Finally, we are
adopting several clarifying, technical and other amendments to Form
ADV.
---------------------------------------------------------------------------
\305\ See supra Section I.
---------------------------------------------------------------------------
1. Economic Baseline and Affected Market Participants
As noted above and in the Proposing Release, the investment adviser
regulatory regime currently in effect serves as the economic baseline
against which the costs and benefits, as well as the impact on
efficiency, competition and capital formation, of the amendments to
Form ADV are discussed. Investment advisers use Form ADV to register
with the Commission and with the states. Once registered, an investment
adviser is required to file an annual amendment within 90 days of the
end of its fiscal year, and more frequently if required by the
instructions to Form ADV.\306\ Form ADV is also used by exempt
reporting advisers to submit, and periodically update, reports to the
Commission by completing a limited subset of items on Form ADV.
Information filed on Form ADV is publicly available through the IAPD
Web site.\307\ The parties that will be affected by the amendments to
Form ADV are: Investment advisers that file Form ADV with the
Commission; the Commission; current and future advisory clients; and
other current and future users of information filed on Form ADV,
including third-party information providers.
---------------------------------------------------------------------------
\306\ See rule 204-1(a) under the Advisers Act.
\307\ Certain personal identifying information is not made
public.
---------------------------------------------------------------------------
2. Analysis of the Amendments to Form ADV and Alternatives
As discussed in Section II. above, we believe the amendments to
Form ADV will improve our ability to oversee investment advisers and
identify potential risks by increasing the amount, consistency, and
reliability of the information disclosed by investment advisers, which
will enhance our staff's ability to effectively carry out the risk-
based examination program and other risk monitoring activities, and may
improve investor protection by informing policy choices and focusing
examination activities. The amendments to Form ADV will address certain
data gaps by requiring advisers to report additional information.
Clients and potential clients may indirectly benefit to the extent that
the amendments improve our oversight of investment advisers.
The enhanced reporting requirements also may directly improve the
ability of clients and potential clients of investment advisers to make
more informed decisions about the selection and retention of investment
advisers.\308\ To the extent that clients and future clients use the
information investment advisers file in Form ADV to differentiate
between investment advisers, the enhanced reporting requirements may
result in a limited increase in competition among investment advisers
for clients. The amendments will likely not have a significant effect
on capital formation or on the ability of investors to efficiently
allocate capital across investments because the amendments do not
directly relate to the amount of capital investors allocate to
investments or their ability to allocate capital across investments. We
further identify effects on efficiency, competition, and capital
formation in the discussion below.
---------------------------------------------------------------------------
\308\ See supra Section II.A.2.a.
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a. Information Regarding Separately Managed Accounts
We are adopting amendments to Form ADV that will require investment
advisers to report information regarding separately managed accounts,
which are managed for clients other than pooled investment
vehicles.\309\ Based on IARD system data, approximately 73% of
investment advisers registered with the Commission reported assets
under management attributable to separately managed accounts.\310\
---------------------------------------------------------------------------
\309\ See supra Section II.A.1.
\310\ Based on IARD system data as of May 16, 2016.
---------------------------------------------------------------------------
We do not currently collect information from investment advisers
specific to separately managed accounts, but we currently collect
detailed information about an adviser's registered investment company
and private fund clients. The absence of detailed information about
separately managed accounts limits the ability of our staff to
understand, monitor and oversee the investment advisers that advise
these accounts and recognize the risk exposures relating to these
accounts. The newly reported information on Form ADV regarding
separately managed accounts is intended to enhance the ability of our
staff to effectively carry out our risk-based examination program and
other risk-monitoring activities, as it does with other information on
ADV and other filings by the Commission. The additional information
regarding separately managed accounts will also assist us in addressing
regulatory issues and identifying areas for additional examination and
enforcement activities.
The additional information investment advisers will file relating
to separately managed accounts will be
[[Page 60443]]
publicly available.\311\ As discussed above, we continue to believe
that public disclosure of information about separately managed accounts
on Form ADV is appropriate in the public interest as well as for the
protection of investors. Commenters expressed concern relating to the
public disclosure of the separately managed account information and its
potential impact on competition between investment advisers. Many
commenters opposing the public disclosure of separately managed account
information cited the potential cost of disclosure of confidential
information, particularly for advisers with a small number of
separately managed account clients.\312\ In addition, other commenters
cited the potential disclosure of proprietary investment or trading
strategies as a potential cost of publicly releasing the separately
managed account information.\313\
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\311\ See supra Section II.A.1.e.
\312\ AIMA Letter; BlackRock Letter; IAA Letter; Invesco Letter;
NYSBA Committee Letter; Oppenheimer Letter; PEGCC Letter; Shearman
Letter; SIFMA Letter. One commenter suggested that investors may
instead invest in a fund structure, or forego investment
opportunities with an investment adviser altogether, rather than
place assets in a separately managed account and risk the disclosure
of separately managed account information. Schulte Letter. As
discussed above, the modifications from the proposal should reduce
the potential for the disclosure of private or sensitive information
relating to separately managed accounts, and should alleviate
potential investor concerns and the effect of the disclosure on
their investment decisions.
\313\ ABA Committee Letter; Dechert Letter; IAA Letter; Invesco
Letter; MFA Letter; NYSBA Committee Letter; Oppenheimer Letter;
Schulte Letter; Shearman Letter; SIFMA Letter.
---------------------------------------------------------------------------
We revised certain items on the form to address commenters'
concerns regarding the potential disclosure of confidential or
proprietary information. As proposed, Item 5.D. would have required
investment advisers to report the number of clients even for investment
advisers that manage fewer than five accounts. In addition, under the
proposed amendments, Section 5.K.(2) of Schedule D would have required
investment advisers to report the number of accounts and the net asset
value of the accounts.\314\ In response to comments, we have revised
Item 5.D. by adding a ``Fewer than 5 clients'' column, which allows
advisers with fewer than five clients in a particular category to avoid
reporting the exact number of clients in that category. In addition,
Section 5.K.(2) in Schedule D will not require investment advisers to
report the number of separately managed accounts. We believe that these
changes mitigate the risk of any client-specific information being
disclosed. In addition, as we discussed in Section II.A., this
information would be reported for one or two data points per year,
depending on the amount of regulatory assets under management
attributable to separately managed accounts, ninety days after the end
of the adviser's fiscal year, and only on an aggregate basis for all
the separately managed account clients that an adviser manages. Given
the limited number of data points that advisers to separately managed
accounts must report on, the fact that the information is reported in
aggregate across an adviser's separately managed accounts, and the time
lag between those data points and any public reporting, we do not
believe that this reporting could compromise trading strategies.
---------------------------------------------------------------------------
\314\ Also, investment advisers will be required to report the
total dollar amount of borrowings that correspond to ranges of gross
notional exposure and not the weighted average amount. See supra
Section II.A.1.c.
---------------------------------------------------------------------------
In the Proposing Release, we also discussed other alternatives. For
example, we could have required different information regarding
separately managed account regulatory assets under management such as
information at different time intervals or with different asset
categories. We have determined not to require reporting at a higher
frequency or in a more granular manner, because, as discussed above, we
believe that the information we are requiring today will appropriately
enhance our staff's ability to effectively carry out our risk-based
examination program and other risk assessment and monitoring
activities, and that more frequent or granular reporting requirements
may increase the costs to investment advisers to report the
information. One commenter suggested as an alternative a separate form
for separately managed account reporting that would be filed on a
confidential basis, but, as discussed above, we believe that given the
changes discussed above, we have mitigated concerns about client
confidentiality.
We proposed to require at least some information about separately
managed accounts from all advisers, and additional information from
advisers with at least $150 million in regulatory assets under
management. In response to commenters who requested modifications to
alleviate potential reporting burdens on smaller advisers relative to
the proposal, we are adopting amendments that require less information
about separately managed accounts than what was proposed for investment
advisers managing at least $150 and less than $500 million in
regulatory assets.\315\ Another alternative would be to require, as
proposed, investment advisers with at least $150 million in separately
managed account regulatory assets under management to provide this
additional information regarding these accounts. However, the higher
threshold we are adopting will reduce the number of investment advisers
required to provide this additional information by approximately 2,800
advisers, thereby reducing costs for those advisers with at least $150
million but less than $500 million in assets under management that
would no longer have to report the additional information. As discussed
in Section II.A.1.c., the $500 million threshold was suggested by
commenters and will provide us information with respect to over 98% of
the separately managed account assets that would have been reported
under the proposed approach.\316\
---------------------------------------------------------------------------
\315\ See supra Section II.A.1.c.
\316\ See IAA Letter; NYSBA Committee Letter; Schwab & Co.
Letter.
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Another alternative would be to collect different information
regarding derivatives in separately managed accounts. For example,
commenters raised concerns about the utility of gross notional exposure
as a measure of derivative risk exposures. Several commenters stated
that gross notional metrics are not accurate measures of risk or
leverage,\317\ and expressed concern that gross notional metrics could
be misleading to or misunderstood by investors without additional
context.\318\ Other commenters suggested alternative measures of
derivative risk exposures.\319\ We recognize that gross notional
metrics do not always reflect the way in which derivatives are used in
a separately managed account and are not a risk measure, but rather
they are commonly used metrics that are comparable to information
collected in Form PF regarding private funds. On balance, therefore, we
continue to believe that, for most types of derivatives the gross
notional metrics generally provide a measure of the scale of an
account's derivatives activities that is sufficient for this regulatory
purpose, which is to collect information about the scale of an
account's derivatives activities, rather than to collect specific risk
metrics or more granular information regarding the ways
[[Page 60444]]
in which derivatives are used in a separate account.\320\
---------------------------------------------------------------------------
\317\ See BlackRock Letter; Dechert Letter; IAA Letter; MFA
Letter.
\318\ See Dechert Letter; IAA Letter; Invesco Letter; MFA
Letter; NYSBA Committee Letter.
\319\ See AIMA Letter; BlackRock Letter; Dechert Letter.
\320\ See supra Section II.A.1.c.
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We are also adopting, as proposed, amendments that will require
investment advisers to report the identity of the custodians that
account for at least ten percent of each adviser's total separately
managed account regulatory assets under management, and the amount held
at such custodians. As discussed in the Proposing Release,\321\
alternatives to the custodian reporting requirements include collecting
different information, changing reporting thresholds, changing the
frequency of reporting, obtaining information from other parties and
not requiring certain information, such as the location of the
custodian's office.\322\ Although requiring less information would
decrease the reporting requirements and the costs to investment
advisers to file Form ADV, as discussed above, we believe that the
reporting requirements as adopted will provide information important to
us and improve the ability of our examination staff to identify
advisers whose clients use the same custodian in the event a concern is
raised about a particular custodian. One commenter suggested that we
should collect data about custodians of separately managed accounts
from the custodians themselves, but considering that the Commission
does not directly regulate all custodians (including banks), we do not
think this alternative appropriately addresses our regulatory
objective.
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\321\ See Proposing Release, supra footnote 3 at Section II.A.1.
\322\ See AIMA Letter; IAA Letter; MMI Letter; NRS Letter;
Oppenheimer Letter; SIFMA Letter regarding the custodian's office
location. See also supra Section II.A.1.d.
---------------------------------------------------------------------------
b. Additional Information Regarding Investment Advisers
In addition to information regarding separately managed accounts,
we are also adopting amendments to collect additional information about
the business of investment advisers and other additional identifying
information. For example, we are adopting amendments to require
investment advisers to disclose information regarding their use of
social media platforms. We are also adopting amendments to request
additional information about an adviser's participation in and assets
under management attributable to wrap fee programs. Other amendments
include replacing ranges with more precise information about the number
of advisory clients and the amount of assets under management, the
total number of offices that conduct investment advisory business, and
information regarding each adviser's top twenty-five largest offices in
terms of numbers of employees. For several items we are requiring
additional identifying information. The additional identifying
information includes the CIK Numbers for all advisers that have
obtained one or more such numbers, PCAOB-assigned numbers for auditing
firms, and the SEC file number and the CRD number for sponsors of wrap
fee programs.
We believe the additional information describing the adviser's
business and the additional identifying information will be useful to
the risk assessment, examination, and oversight of investment advisers.
For example, the information regarding social media platforms will
improve our understanding of how advisers use social media to
communicate with current and potential clients. The additional
identifying information will improve the ability of our staff and other
current and future users of Form ADV information to cross-reference
information from Form ADV with information from filings and other
sources to investigate and obtain a more complete understanding of the
business and relationships of investment advisers, and improve our
oversight of investment advisers. In addition, to the extent that
current and future investment advisory clients are interested in the
information, the information may improve their ability to make informed
decisions about the selection and retention of investment advisers.
Several commenters expressed concern that the additional
information describing the advisory business and the additional
identifying information would increase the burden on investment
advisers to file Form ADV.\323\ In addition, commenters questioned the
benefits of the additional information and the additional identifying
information to clients or potential clients and to the Commission. For
example, one commenter raised concern regarding the usefulness of
replacing ranges with the number of advisory clients and the regulatory
assets under management attributable to each client type.\324\ In
addition, commenters believed that information regarding social media
would not be informative to investors, who may be more likely to obtain
the information through the adviser's Web site or internet
searches.\325\ Several commenters also expressed concern that the
reporting of adviser offices would impose a significant burden on
advisers with little or no benefit to either the Commission or
investors.\326\
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\323\ Several commenters stated that advisers would need to
update computer systems to obtain this data, and raised concerns
about the increased burden that our proposal would place on
advisers. ASG Letter; IAA Letter; LPL Letter; MMI Letter. Commenters
also expressed concerns that investment advisers would need to
update the additional information on more than an annual basis which
would increase the burden on investment advisers. See BlackRock
Letter; Morningstar Letter; NRS Letter; SIFMA Letter. We have
clarified that certain information, such as information about
additional offices, must only be updated on an annual basis, which
should help address these concerns.
\324\ ACG Letter.
\325\ ASG Letter; JAG Letter; Morgan Letter; Morningstar Letter;
NRS Letter; NYSBA Committee Letter.
\326\ ACG Letter; CFA Letter; Morningstar Letter; NRS Letter;
NYSBA Committee Letter.
---------------------------------------------------------------------------
Alternatives to the amendments regarding disclosure of additional
information about advisers include the disclosure of different
information, more information, or less information on topics such as
social media or advisers' offices.\327\ When determining the specific
amendments to Form ADV for adoption, we considered what information
would be important for our oversight activities and for advisory
clients and prospective clients to make decisions regarding the
selection or retention of investment advisers against the costs to
investment advisers to report this information. We believe that the
amendments we are adopting today strike an appropriate balance of
providing important information to the Commission, advisory clients and
prospective clients while mitigating the burden on investment advisers
to report the information. As noted above, however, we recognize that
the burden on some large advisers might be significant, especially in
the initial reporting cycle when they are required to report the
additional information for the first time. However, we believe that the
burden will decrease after the initial filing because in subsequent
filings, advisers will only be reporting changes to their previously
reported information.
---------------------------------------------------------------------------
\327\ See supra footnote 111 and accompanying text.
---------------------------------------------------------------------------
Another alternative to the amendments to Form ADV would be for us
not to require investment advisers to report additional information but
instead for us to undertake targeted examinations of investment
advisers. We believe it is more efficient to compile information about
advisers that can then be utilized to identify specific advisers for
examinations. An absence of information about advisers also would
reduce our ability to identify industry trends and assess risks.
[[Page 60445]]
c. Costs Applicable to Reporting Information Regarding Separately
Managed Accounts and Additional Information on Form ADV
The amendments that will require investment advisers to provide
additional information about certain aspects of their business will
impose additional costs, at least initially, for investment advisers to
file Form ADV, but we believe based on our experience that much of the
information we are requiring is readily available because it is used by
investment advisers to conduct their business. Costs will vary across
advisers, depending on the nature and size of an adviser's
business.\328\ For example, advisers that manage a limited number of
separately managed accounts or that have smaller amounts of assets
under management in those accounts will have fewer reporting
requirements than advisers that manage a large number of separately
managed accounts or that have larger amounts of assets under management
in those accounts. In addition, investment advisers with a larger
number of offices will have greater reporting requirements than
investment advisers with fewer offices, particularly in the case of the
initial filing. The one-time costs to initially report the information
on Form ADV will also be greater for those investment advisers that
currently do not collect or maintain the information. In addition, some
amendments to Form ADV will require information that will impose a
fixed filing cost that is not scalable with size, and therefore will
have a relatively greater impact on small investment advisers.
---------------------------------------------------------------------------
\328\ Several commenters expressed concern that the proposed
amendments would increase the costs for small advisers. See Comment
Letter of Adrian Day Asset Management (May 21, 2015) (``Adrian Day
Letter''); AIMA Letter; Diercks Letter; IAA Letter; SBIA Letter;
Schwab & Co. Letter. For a discussion of these comments, please see
the Final Regulatory Flexibility Analysis in Section V infra.
---------------------------------------------------------------------------
To the extent possible, we have attempted to quantify the costs of
these amendments to Form ADV. Certain commenters questioned the cost
estimates of the amendments to Form ADV, and some commenters noted that
advisers will have to create new systems or processes to capture the
additional information required and that the Commission underestimated
these costs.\329\ We believe that much of the information, such as
regulatory assets under management, should be readily available to
advisers, and that modifications to the proposed amendments, such as
the reporting requirements relating to separately managed accounts,
help mitigate the costs to investment advisers of reporting the
additional information. As discussed in Section V., for purposes of the
increased Paperwork Reduction Act (``PRA'') burden for Form ADV, we
estimate that each adviser will incur average costs in connection with
the amendments to Form ADV of approximately $1,273,\330\ for a total
aggregate cost of $15,306,552.\331\
---------------------------------------------------------------------------
\329\ Adrian Day Letter; Financial Engines Letter; IAA Letter;
NRS Letter; PCA Letter; SBIA Letter. One commenter noted that it
would require significant systems work to aggregate gross notional
exposure calculations at the investment adviser level. SIFMA II
Letter. Other commenters also noted that investment advisers would
need to modify or update computer software systems. ASG Letter; MMI
Letter.
\330\ We estimate that each adviser will spend, on average, 3
hours to complete the questions regarding separately managed
accounts. We further estimate that the amendments to Part 1A that
request other additional information will take each adviser, on
average, 2 hours to complete. As a result, we estimate a 5 hour
increase in the total average time burden related to the amendments
to Form ADV. We expect that the performance of this function will
most likely be equally allocated between a senior compliance
examiner and a compliance manager. Data from the Securities Industry
Financial Markets Association's Management & Professional Earnings
in the Securities Industry 2013 (``SIFMA Management and Professional
Earnings Report''), modified by Commission staff to account for an
1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead,
suggest that costs for a senior compliance examiner and a compliance
manager are $221 and $288 per hour, respectively. [2.5 hours x $221
= $553] + [2.5 hours x $288 = $720] = $1,273.
\331\ 12,024 advisers x $1,273 = $15,306,552.
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d. Umbrella Registration
The amendments to Form ADV that will incorporate the concept of
umbrella registration and establish a method on Form ADV for certain
private fund advisers to use umbrella registration will simplify, and
therefore make more efficient the filing procedures for these advisers
and provide greater certainty about the availability of umbrella
registration. The amendments will also improve the consistency and
quality of the information that private fund advisers disclose about
their business and provide a more complete picture of groups of private
fund advisers that operate as a single business, thus allowing for
greater comparability across private fund advisers that rely on
umbrella registration.\332\ As of May 16, 2016, approximately 743
registered advisers indicated on Form ADV that they relied on the 2012
ABA Letter. Additional advisers may be eligible to use umbrella
registration but do not currently do so.
---------------------------------------------------------------------------
\332\ See supra Section II.A.3.
---------------------------------------------------------------------------
Several commenters suggested that the Commission expand the
eligibility for umbrella registration to even more advisers. For
example, many commenters recommended expanding eligibility for umbrella
registration to non-U.S. filing advisers,\333\ and other commenters
suggested expanding eligibility for umbrella registration to exempt
reporting advisers.\334\ Other commenters recommended that we expand
the eligibility for umbrella registration to apply to all related
persons of a filing adviser.\335\ Although expanding the eligibility
for umbrella registration to all related persons might decrease the
aggregate costs of filing Form ADV, as we discussed above, we do not
believe umbrella registration is appropriate for advisers that are
related but that operate separate advisory businesses as it would
compromise data quality and complicate analyses that rely on data from
Form ADV.
---------------------------------------------------------------------------
\333\ ABA Committee Letter; AIMA Letter; Dechert Letter; NYSBA
Committee Letter; Schulte Letter; Shearman Letter.
\334\ ABA Committee Letter; ACG Letter; AIMA Letter; ASG Letter;
MFA Letter; NYSBA Committee Letter; SBIA Letter; Schulte Letter;
Shearman Letter.
\335\ ACG Letter; Capital Research Letter; Dechert Letter;
Morgan Letter; NRS Letter; NYSBA Committee Letter.
---------------------------------------------------------------------------
For purposes of the PRA, we estimate that each adviser that files
Schedule R will incur average costs of approximately $255,\336\ for a
total aggregate cost of $189,465.\337\ We do not believe the amendments
to provide for umbrella registration will impose significant costs on
investment advisers because advisers currently relying on the 2012 ABA
Letter are already reporting much of the information that will be
reported on Schedule R. We believe that the additional information that
will be reported for relying advisers on Schedule R, such as the basis
for SEC registration and form of organization, will be readily
available to filing advisers.\338\
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\336\ We estimate that for purposes of the PRA, the filing
adviser will spend on average 1 hour completing Schedule R on behalf
of its relying advisers. We expect that the performance of this
function will most likely be equally allocated between a senior
compliance examiner and a compliance manager. Data from the SIFMA
Management and Professional Earnings Report, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead, suggest that costs for a senior compliance
examiner and a compliance manager are $221 and $288 per hour,
respectively. (.5 hours x $221 = $111) + (.5 hours x $288 = $144) =
$255.
\337\ 743 advisers x $255 = $189,465.
\338\ One commenter was concerned that relying advisers would in
effect be forced to share the details of employee compensation on a
public filing. See Shearman Letter. The ownership information
required of relying advisers, however, is consistent with the
ownership information currently required of filing advisers.
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[[Page 60446]]
e. Clarifying, Technical and Other Amendments to Form ADV
The clarifying, technical and other amendments to Form ADV will
make the filing process clearer and therefore more efficient for
advisers, and increase the reliability and the consistency of
information provided by investment advisers. More reliable and
consistent information will improve our staff's ability to interpret
and evaluate the information provided by advisers, make comparisons
across investment advisers, and better identify the investment advisers
that may need additional outreach or examination. To the extent the
clarifying and technical amendments we adopt today would make Form ADV
easier to understand and complete, the amendments will decrease future
filing costs, especially for those investment advisers registering with
us for the first time.
As proposed, we are adding questions to Form ADV that request an
entity's legal entity identifier, if any.\339\ As discussed above, the
legal entity identifier is a unique identifier associated with a single
entity and is intended to provide a uniform international standard for
identifying parties to financial transactions. This information will
help our examination staff more readily identify the use of particular
custodians by separately managed accounts and private funds.
Furthermore, the reporting of legal entity identifier information on
Form ADV facilitates the ability of investors and the Commission to
link the data reported with data from other filings or sources that is
reported elsewhere as legal entity identifiers become more widely used
by regulators and the financial industry. For example, this could aid
in the performance of market analysis studies, surveillance activities,
and systemic risk monitoring by the Commission.\340\
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\339\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(3)(f)
(requesting the LEI, if any, for a custodian of separately managed
accounts that is not a broker-dealer or that is a broker-dealer but
does not have an SEC registration number) and 7.B.(1), Question 25g
(similar question for private fund custodians); Schedule R, Section
1.G. (requesting LEI for relying adviser).
\340\ We note that, as of May 31, 2016, approximately 6.80% of
all registered investment advisers report a legal entity identifier
when filing Form ADV.
---------------------------------------------------------------------------
We do not believe that the clarifying, technical and other
amendments to Form ADV will result in any additional costs for
investment advisers and could result in some cost savings to the extent
that advisers have fewer questions to research when completing the
form. We have identified provisions of Form ADV that have caused
confusion among filers in the past or that have resulted in
inconsistent or unreliable information. As we discussed above, we
believe that the clarifications and revisions to the questions and
instructions of Form ADV will increase the efficiency of investment
advisers to disclose information, and our ability to oversee investment
advisers. Finally, given the nature of the clarifying, technical and
other amendments to Form ADV that we are adopting today, we do not
believe that these amendments will have an impact on capital formation
or competition in the asset management industry or the markets in
general.
f. Exempt Reporting Advisers
We believe the amendments to Form ADV will have a limited economic
effect on exempt reporting advisers, including on their costs.\341\
Exempt reporting advisers are currently required to complete only a
limited number of items in Part 1A of Form ADV (consisting of Items 1,
2.B., 3, 6, 7, 10, 11 and corresponding schedules). We are adopting
limited amendments to the items that exempt reporting advisers are
required to complete, including the amendments to Item 1 regarding the
use of social media and the reporting of information on up to 25
offices.\342\ We do not know the extent of social media use by exempt
reporting advisers, and we recognize that these advisers will incur
some costs associated with social media account reporting. We believe
these costs will be limited based on the nature of exempt reporting
adviser clients, which include venture capital funds and private funds.
Approximately 15 of the approximately 3,248 exempt reporting advisers
that file information with the Commission on Form ADV reported that
they had five or more other offices. Thus, although exempt reporting
advisers will incur costs to report the additional information, based
on our staff's experience and given the nature of the clients these
funds advise, we expect that the amendments should result in a limited
increase in reporting costs relative to other advisers.
---------------------------------------------------------------------------
\341\ See supra Section II.A.2.c. for a discussion of exempt
reporting advisers and Amended Form ADV, Part 1A, Schedule D,
Section 7.B.(1), Question 15(b).
\342\ Exempt reporting advisers will not be eligible to file new
Schedule R.
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C. Amendments to Investment Advisers Act Rules
As discussed above, we are adopting amendments to the Advisers Act
books and records rule, and technical amendments to several other rules
to remove transition provisions where the transition process is
complete. The discussion below focuses on the amendments to the
Advisers Act books and records rule, because the technical amendments
are clarifying or ministerial in nature and therefore should have
little, if any, economic effects.
The amendments to rule 204-2 will require investment advisers to
maintain additional materials related to the calculation and
distribution of performance information. The amendments to rule 204-
2(a)(16) will require each adviser to maintain the materials listed in
rule 204-2(a)(16) that demonstrate the calculation of the performance
or rate of return in any communication that the adviser circulates or
distributes, directly or indirectly, to any person, rather than ten or
more persons as currently required by the rule. The amendments to rule
204-2(a)(7) will require each adviser to maintain originals of all
written communications received and copies of written communications
sent by the adviser relating to the performance or rate of return of
any or all managed accounts or securities recommendations. We believe,
based on our staff's experience, and several commenters agreed, that
most investment advisers currently maintain the information that will
be required to be maintained under amended rule 204-2.\343\ Under the
amendments, each respondent will be required to retain records in the
same manner and for the same period of time as currently required under
rule 204-2.
---------------------------------------------------------------------------
\343\ ABA Committee Letter; Morningstar Letter; PCA Letter.
---------------------------------------------------------------------------
1. Economic Baseline and Affected Market Participants
As noted above, the regulatory regime as it exists today for
investment advisers serves as the economic baseline against which the
costs and benefits, as well as the impact on efficiency, competition,
and capital formation, of the amendments to the Advisers Act books and
records rule (rule 204-2) will be evaluated. The parties that will be
directly affected by the amendments to rules under the Advisers Act
include: Investment advisers registered with the Commission; the
Commission; and current and future investment advisory clients. As
discussed above, approximately 12,024 investment advisers are currently
registered with the Commission.
[[Page 60447]]
2. Analysis of the Effects of the Amendments to the Advisers Act Books
and Records Rule
The amendments to the Advisers Act books and records rule (rule
204-2) will benefit the clients and prospective clients of investment
advisers by improving our ability to oversee investment advisers and
making available to our examination staff all records necessary to
evaluate performance information.
The amendments to the books and records rule will provide our
enforcement and examination staff with additional information to review
an adviser's performance communications, regardless of the number of
clients or prospective clients that receive performance communications.
The rule amendments may increase investor protection by increasing the
disincentive for misleading or fraudulent communications, which may
reduce incidents of fraud. In addition, investors may benefit from the
amendments to the recordkeeping rule as these records will assist our
staff in uncovering fraudulent or misleading communications regarding
performance.
As we discussed in the Proposing Release, to the extent that the
amendments to the rule reduce misleading or fraudulent communications,
the competitive position of investment advisers could be improved
because clients and potential clients will receive more accurate
information regarding an adviser's performance and thus will be better
able to differentiate among advisers.\344\ In addition, to the extent
that the amendments to the rule improve the ability of clients and
potential clients to differentiate among advisers, potential clients
may be more likely to obtain investment advice from an investment
adviser, which will increase the ability of investment advisers to
compete for investor capital. The amendments could improve the ability
of investors to better or more efficiently allocate capital across
investments to the extent that the current allocation of capital is
based on misleading or fraudulent information, which in turn could
promote capital formation.
---------------------------------------------------------------------------
\344\ Proposing Release, supra footnote 3 at Section III.C.2.
---------------------------------------------------------------------------
An alternative suggested by several commenters would be to exclude
from the rule one-on-one communications that are ``customized responses
from investors or one-on-one communications with sophisticated
investors or clients'' about their own account performance.\345\
Another alternative would be to require maintenance of records
supporting performance claims in communications that are distributed or
circulated to less than the current threshold of ten persons. As
discussed above, we believe the veracity of performance information is
important regardless of whether it is a personalized client
communication or in an advertisement sent to ten or more persons, and
the absence of such records can reduce our ability to examine and
monitor advisers.\346\
---------------------------------------------------------------------------
\345\ PEGCC Letter. See also Berlin Letter; LPL Letter.
\346\ See supra Section II.B.1.
---------------------------------------------------------------------------
Several commenters felt the proposed amendments would be
unnecessary and a burden on investment advisers. Some raised concerns
regarding the potential burden to comply with the amendments to rule
204-2,\347\ and one commenter noted that while the amendments were not
themselves burdensome, when aggregated with other recordkeeping
obligations, could lead to overall compliance burdens for smaller
advisers.\348\ Based on our staff's experience and our analysis of the
comments to the Proposing Release, however, we believe that most
advisers already maintain this information.\349\ We also believe that
this information is useful to the examination and oversight of
advisers.\350\
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\347\ See ACG Letter; Anonymous Letter; ASG Letter; NRS Letter;
PEGCC Letter; SBIA Letter.
\348\ SBIA Letter.
\349\ ABA Committee Letter; Morningstar Letter; PCA Letter.
\350\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA
Letter. See also IAA Letter.
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We estimate that, for purposes of the PRA, advisers will incur an
aggregate cost of approximately $1,071,338 per year for the total hours
advisory personnel will spend in complying with the amended
recordkeeping requirements.\351\ A possible non-quantifiable cost as a
result of the amended recordkeeping requirements will be discouraging
advisers from creating and communicating custom performance information
to individual clients, who will then lose the benefit of having that
information available to them. Although we believe that such a response
to the rule will be unlikely, a decrease in communications could reduce
the ability of clients and potential clients to compare advisers and
potentially decrease competition.
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\351\ We estimate that for purposes of the PRA, the amendments
to rule 204-2 will increase the burden by 1.5 hours per adviser
annually. We expect that the function of recording and maintaining
records of performance information and communications will be
performed by a combination of compliance clerks and general clerks
at a cost of $65 per hour and $58 per hour, respectively. We
anticipate that compliance clerks would perform an estimated 0.3
hours of the work created by the amendments to rule 204-2 and
general clerks would perform the additional 1.2 hours. Therefore,
the total cost per adviser would be (0.3 hours x $65 = $19.50) +
(1.2 hours x $58 = $69.60) = approximately $89.10 for a total cost
of $1,071,338 (12,024 advisers x $89.10).
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We expect that these costs will vary among firms, depending on a
number of factors, including the degree to which advisers already
maintain correspondence, performance information, and the inputs and
worksheets used to generate performance information. Compliance costs
also will vary depending on the degree to which performance figure
determination and the recordkeeping process is automated, and the
amount of updating to the adviser's recordkeeping policy that will be
required.
V. Paperwork Reduction Act Analysis
The amendments that we are adopting today contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\352\ In the Proposing Release, we
solicited comment on the proposed collection of information
requirements. We also submitted the proposed collections of information
to the Office of Management and Budget (``OMB'') for review in
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The titles for the
collections of information we are amending are: (i) ``Form ADV;'' and
(ii) ``Rule 204-2 under the Investment Advisers Act of 1940.'' An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number.
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\352\ 44 U.S.C. 3501-3520.
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A. Form ADV
Form ADV (OMB Control No. 3235-0049) is the two-part investment
adviser registration form. Part 1 of Form ADV contains information used
primarily by Commission staff, and Part 2 is the client brochure. We
are not adopting changes to Part 2. We use the information to determine
eligibility for registration with us and to manage our regulatory and
examination programs. Clients use certain of the information to
determine whether to hire or retain an adviser. The collection of
information is necessary to provide advisory clients, prospective
clients, and the Commission with information about the adviser and its
business, conflicts of interest and personnel. Rule 203-1 under the
Advisers Act requires every person applying for investment adviser
registration with the Commission to file Form ADV. Rule 204-4 under the
[[Page 60448]]
Advisers Act requires certain investment advisers exempt from
registration with the Commission (``exempt reporting advisers'') to
file reports with the Commission by completing a limited number of
items on Form ADV. Rule 204-1 under the Advisers Act requires each
registered and exempt reporting adviser to file amendments to Form ADV
at least annually, and requires advisers to submit electronic filings
through the IARD. The paperwork burdens associated with rules 203-1,
204-1, and 204-4 are included in the approved annual burden associated
with Form ADV and thus do not entail separate collections of
information.
These collections of information are found at 17 CFR 275.203-1,
275.204-1, 275.204-4 and 275.279.1 and are mandatory. Responses are not
kept confidential. The respondents are investment advisers registered
with the Commission or applying for registration with the Commission
and exempt reporting advisers. Based on IARD system data as of May 16,
2016, approximately 12,024 investment advisers are registered with the
Commission, and 3,248 exempt reporting advisers file reports with the
Commission.
The currently approved total annual aggregate burden estimate for
all advisers completing, amending and filing Form ADV (Part 1 and Part
2) with the Commission is 154,402 hours with a monetized cost of
$36,670,427. This collection is based on: (i) Total annual collection
of information burden for SEC-registered advisers to file and complete
Form ADV (Part 1 and Part 2), including private fund reporting, plus
the burden associated with amendments to the form, preparing brochure
supplements and delivering codes of ethics to clients; and (ii) the
total annual collection of information burden for exempt reporting
advisers to file and complete the required items of Part 1A of Form
ADV, including the private fund reporting, plus the burden associated
with amendments to the form.
As discussed above, we are adopting amendments to Form ADV that are
designed to provide additional information about investment advisers
and their clients, including clients in separately managed accounts,
provide for umbrella registration for private fund advisers and clarify
and address technical and other issues in certain Form ADV items and
instructions. The amendments we are adopting will increase the
information requested in Part 1A of Form ADV, and we expect that this
will correspondingly increase the average burden on an adviser filing
Form ADV.
As discussed in Sections II.A. and II.B. of this Release, we
received several comments that addressed whether the amendments to Form
ADV and Rule 204-2 are necessary, whether there are ways to enhance the
quality, utility, and clarity of the information to be collected, and
whether we could further minimize the burden. Certain commenters
addressed the accuracy of our burden estimates for the proposed
collections of information, suggesting in general that our estimates
were too low.\353\ We have considered these comments and have made
certain modifications designed to address these and other comments
received, and we are increasing our PRA burden estimates related to the
amendments.
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\353\ ACG Letter; Adrian Day Letter; ASG Letter; Anonymous
Letter; IAA Letter; NRS Letter; PEGCC Letter; PCA Letter; SBIA
Letter. See also AIMA Letter (discussed reputational and marketing
costs associated with separately managed account reporting).
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We discuss below, in three subsections, the estimated revised
collection of information requirements for Form ADV: First, we provide
estimates for the revised burdens resulting from the amendments to Part
1A; second, we determine how those estimates will be reflected in the
annual burden attributable to Form ADV; and third, we calculate the
total revised burdens associated with Form ADV. The paperwork burdens
of filing an amended Form ADV, Part 1A will vary among advisers,
depending on factors such as the size of the adviser, the complexity of
its operations, and the number or extent of its affiliations.
1. Changes in Average Burden Estimates
As a result of the differing burdens on advisers to complete Form
ADV, we have divided the effect of the amendments to the form into
three subsections; first we address the change to the collection of
information for registered advisers as a result of our amendments to
Part 1A of Form ADV excluding those changes related to private funds;
second, we discuss the amendments to Form ADV related to registered
advisers to private funds, including the amendments to Section 7.B. of
Schedule D and the new Schedule R that will implement umbrella
registration; and third, we address the amendments to Form ADV
affecting exempt reporting advisers.
a. Estimated Change in Burden Related to Part 1A Amendments (Not
Including Private Fund Reporting)
We are adopting amendments to Part 1A, some of which are merely
technical changes or very simple in nature, and others that will
require more time for an adviser to prepare a response. Advisers should
have ready access to all the information necessary to respond to the
items we are adopting today in their normal course of operations,
because they likely maintain and use the requested information in
connection with managing client assets. We anticipate that the
responses to many of the questions will be unlikely to change from year
to year, which will minimize the ongoing reporting burden associated
with these questions.
i. Amendments Related to Reporting of Separately Managed Account
Information
The amendments to Part 1A, Items 5.K.(1), 5.K.(2), 5.K.(3) and
5.K.(4) and Schedule D, Sections 5.K.(1), 5.K.(2) and 5.K.(3) are
designed to collect information about the separately managed accounts
managed by advisers. These amendments will enhance existing information
we receive and permit us to conduct more robust risk monitoring with
respect to advisers of separately managed accounts. As discussed above,
the information collected about separately managed accounts will
include regulatory assets under management reported by asset type,
borrowings and derivatives information, and the identity of custodians
that hold at least ten percent of separately managed account regulatory
assets under management. We believe that advisers to separately managed
accounts may maintain and use this or similar information for
operational reasons (e.g., trading systems) and for customary account
reporting to clients in separately managed accounts.
Although we understand that much of the requested information may
be used by advisers for operational reasons or account reporting, we
expect that these amendments may subject advisers, particularly those
that advise a large number of separately managed accounts and engage in
borrowings and derivatives transactions on behalf of separately managed
accounts, to an increased paperwork burden. We are adopting new Items
5.K.(1) through (4) and Sections 5.K.(1) and 5.K.(3) largely as
proposed with certain modifications in response to comments we
received. With respect to Section 5.K.(2), in order to minimize the
burden on advisers
[[Page 60449]]
with a smaller amount of separately managed account assets under
management, we initially proposed to require: (1) Advisers with
regulatory assets under management attributable to separately managed
accounts of at least $150 million but less than $10 billion to report
borrowings and derivatives information as of the date the adviser
calculates its regulatory assets under management for purposes of its
annual updating amendment; and (2) advisers with regulatory assets
under management attributable to separately managed accounts of at
least $10 billion to report information as of that date and six months
before that date. As we discussed above,\354\ at the suggestion of
several commenters,\355\ we increased the proposed $150 million
reporting threshold to $500 million in order to further alleviate the
reporting burdens on smaller advisers without compromising our
objectives.\356\ In response to commenters, we modified Section 5.K.(2)
to base the reporting of borrowings and derivatives on regulatory
assets under management in separately managed accounts, rather than the
net asset value of the accounts, as proposed, because advisers may not
characterize their separately managed accounts using net asset
value.\357\ We also eliminated the requirement to report number of
accounts. We believe that these changes will further decrease the
burden on advisers to report information on separately managed
accounts.
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\354\ Supra Section II.A.1.
\355\ IAA Letter; NYSBA Committee Letter; Schwab & Co. Letter.
\356\ Amended Form ADV, Part 1A, Schedule D, Section 5.K.(2).
\357\ See IAA Letter.
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In the Proposing Release, we estimated that each adviser would
spend, on average, 2 hours completing the questions regarding
separately managed accounts in the first year a new or existing
investment adviser completes these questions.\358\ A number of
commenters expressed concern that our estimate of the paperwork burdens
associated with our proposed questions regarding separately managed
accounts was too low.\359\ We are revising our estimate of the time
that that it will take each adviser to complete the questions regarding
separately managed accounts in the first year a new or existing adviser
completes these questions from 2 hours to 3 hours.\360\ We have arrived
at this burden estimate by considering the following: (1) The changes
we are making to Part 1A, Items 5.K.(1), 5.K.(2), 5.K.(3) and 5.K.(4)
and Schedule D, Sections 5.K.(1), 5.K.(2) and 5.K.(3); (2) our efforts
to further alleviate the reporting burden on advisers that manage a
smaller amount of separately managed account regulatory assets under
management; and (3) the comments we received on our proposed burden
estimate. We recognize that burdens will vary across advisers. Advisers
that advise a large number of separately managed accounts, or that have
significant regulatory assets under management attributable to
separately managed accounts, will incur a greater burden than advisers
that have no separately managed account clients or a limited number of
such clients. Based on our review of advisers' separately managed
account business and the new reporting requirements, we believe that,
on average, 3 hours is an appropriate estimate.
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\358\ Proposing Release, supra footnote 3 at Section IV.A.1.a.i.
\359\ Adrian Day Letter; ASG Letter (one adviser suggested that
outsourcing the work might be costly; another adviser reported
having the required data but estimated that it would take
approximately 1 hour to compile data in response to Sections
5.K.1(a) and (b)); IAA Letter. See also NYSBA Committee Letter (the
proposed amendments to Form ADV and the Advisers Act will
significantly increase the reporting obligations for many advisers);
NRS Letter (burden estimate for proposed amendments is completely
unrealistic and extremely low); SIFMA II Letter (most exposure data
is gathered at the client or account level and it would require
significant systems work to aggregate these values at the adviser
level).
\360\ Based on IARD system data as of May 16, 2016,
approximately 8,718 registered investment advisers, or approximately
73% of all investment advisers registered with us, reported assets
under management from clients other than registered investment
companies, business development companies and pooled investment
vehicles, indicating that they have assets under management
attributable to separately managed accounts. Of those approximately
8,718 advisers, we estimate that 2,538 (approximately 29%) reported
at least $500 million and less than $10 billion in regulatory assets
under management from separately managed accounts and 545
(approximately 6%) reported at least $10 billion in regulatory
assets under management from separately managed account clients.
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ii. Other Additional Information Regarding Investment Advisers
We are adding several new questions and amending existing questions
on Form ADV regarding an adviser's identifying information, advisory
business, and financial industry affiliations. The revised questions
primarily refine or expand existing questions or request information we
believe that advisers already have for compliance purposes. For
example, we are requiring each adviser to provide CIK Numbers if it has
one or more such numbers and to provide the address of each of the
adviser's social media pages. Other questions require advisers to
provide readily available or easily accessible information, such as the
amendment to Part IA, Item 1.O. that requires advisers to report their
assets within ranges. However, some of the revised questions may take
longer for advisers to complete, such as the amendments to Schedule D,
Section 1.F that require information about an adviser's 25 largest
offices other than its principal office and place of business. While
this information should be readily available to an adviser because it
should be aware of its offices, a clerk will be required to manually
enter expanded information about the adviser's offices in the first
year the adviser responds to the item and then make updates in
subsequent years. Some commenters thought that additional office
reporting would be a significant burden on advisers.\361\ As discussed
above in Section II.A.2.a., we recognize that the burden on some large
advisers might be significant, especially in the initial reporting
cycle when they are required to report their additional offices for the
first time. However, we believe that the burden will decrease after the
initial filing because in subsequent filings, advisers will only be
reporting changes to their previously reported additional office
information. We have clarified that advisers will only be required to
update the information in Section 1.F. on an annual basis, which should
help address some of the concerns raised by commenters about the burden
associated with this amendment.\362\
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\361\ ACG Letter; CFA Letter; Morningstar Letter (for larger
advisers, additional office reporting would require substantial
time, although that burden would ease after the initial reporting
period); NYSBA Committee Letter.
\362\ ASG Letter (updating additional office reporting more than
annually would be burdensome); Morningstar Letter (the Commission
should clarify how often additional office reporting needs to be
updated).
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We are adopting a number of amendments to Item 5 in addition to the
questions relating to separately managed accounts discussed above. Like
other new or revised items, we believe several of these new Item 5
questions will require advisers to provide readily available
information, such as the number of clients and regulatory assets under
management attributable to each category of clients during the last
fiscal year. Advisers currently provide this information in ranges, and
therefore likely already have available to them the more precise
numbers to report. In addition, information such as whether the adviser
uses different assets under management numbers in Part 1A vs. Part 2A
of Form ADV should be readily available. Other revised items will
likely present greater burdens for some
[[Page 60450]]
advisers but not others, depending on the nature and complexity of
their businesses. For instance, the burden associated with the revised
disclosure regarding wrap fee programs or non-U.S. clients will depend
on whether and to what extent an adviser allocates client assets to
wrap fee programs or the extent to which the adviser has non-U.S.
clients.
In the Proposing Release, we estimated that the proposed revisions
to Part 1A of Form ADV and Schedule D would take each adviser
approximately 1 hour, on average, to complete in the first year a new
or existing adviser responds to the questions.\363\ Some commenters
expressed concern that our burden estimate was too low,\364\ while
others expressed concern about the impact of the increased overall
compliance burden on smaller advisers.\365\ We are revising our
estimate of the time that these amendments to Part 1A of Form ADV and
Schedule D will take each adviser to complete in the first year a new
or existing adviser responds to these questions from 1 hour to 2 hours.
We have arrived at this revised burden estimate, in part, by
considering the following: (1) The relative complexity and availability
of the information required by the revised items to the current form
and its approved burden; (2) the number and types of advisers affected
by the proposed amendments; and (3) the comments we received on our
proposed burden estimate. We understand that the burden will vary
across advisers depending on their business and the factors discussed
in this section. The burden for some advisers will exceed our estimate,
and the burden for others will be less due to the nature of their
business. We believe, on balance, that 2 hours is a reasonable
estimate.
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\363\ Proposing Release, supra footnote 3 at Section
IV.A.1.a.ii.
\364\ ASG Letter (amendments will increase the time required to
prepare response to Item 5). See NYSBA Committee Letter (the
proposed amendments to Form ADV and the Advisers Act will
significantly increase the reporting obligations for many advisers);
NRS Letter (burden estimate for proposed amendments is completely
unrealistic and extremely low).
\365\ PCA Letter (Commission grossly underestimated the
potential cost for many advisers, particularly small advisers); SBIA
Letter (Commission should consider the impact of the increased
overall compliance burden on smaller private fund advisers).
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iii. Clarifying, Technical and Other Amendments
As discussed above, we are adopting several further amendments to
Form ADV that are designed to clarify the Form and its instructions and
address technical issues. These changes primarily refine existing
questions. For example, we are deleting the phrase ``newly formed
adviser'' from Part IA, Item 2.A.(9) because of questions from filers
about whether that phrase refers to only newly formed corporate
entities. Similarly, we are amending Part IA, Item 8.B.(2) to clarify
that the question applies to any related person who recommends the
adviser to advisory clients or acts as a purchaser representative.
Because these amendments do not change the scope or amount of
information required to be reported on Form ADV, we do not believe that
these clarifying, technical, and other amendments to Part 1A of Form
ADV will increase or decrease the average total collection of
information burden for advisers in their first year filing Form ADV. We
did not receive comments regarding reporting burdens associated with
these technical and clarifying amendments.
As a result of the amendments to Form ADV Part 1A discussed above,
including the amendments related to separately managed accounts,
additional items, and technical and clarifying amendments, we estimate
the average total collection of information burden will increase 5
hours to 45.74 hours per adviser for the first year that an adviser
completes Form ADV (Part 1 and Part 2).\366\
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\366\ Currently approved estimate of the average total
collection of information burden per SEC registered adviser for the
first year that an adviser completes Form ADV (40.74 hours) + 3
hours to complete the questions about separately managed accounts +
2 hours to complete other additional information regarding
investment advisers = 45.74 hours.
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b. Estimated Changes in Burden Related to Private Fund Reporting
Requirements
We are adopting several amendments to Part 1A, Schedule D, Section
7.B. that will refine and enhance existing information we receive about
advisers to private funds. In addition, as part of our codification of
umbrella registration, we are adding a new schedule to Part 1A--
Schedule R--to be submitted by advisers to private funds that use
umbrella registration to file a single Form ADV. We believe the
information required by the amendments to Part 1A, Schedule D, Section
7.B will be readily available or easily accessible to advisers to
private funds. For example, the PCAOB assigned number for a private
fund auditor should be readily available or easily accessible to that
private fund's adviser. As discussed in Section II.A.2.c., we modified
Part 1A, Schedule D, Section 7.B.(1). Question 15(b) regarding sales of
private funds to qualified clients in response to commenters' concerns.
The question is now limited to 3(c)(1) funds, and requires only a
``yes'' or ``no'' answer, rather than requiring advisers to report the
percentage of a private fund held by qualified clients. Other
amendments to Section 7.B. are designed to make the questions easier to
answer, but do not cause a change in reporting burden, including moving
certain ``notes'' to questions and changes to the current question
regarding unqualified opinions. The currently approved total annual
burden estimate for advisers making their initial filing in completing
Item 7.B. and Schedule D, Section 7.B. is 1 hour per private fund. We
do not estimate that the amendments to Schedule D, Section 7.B,
including the changes from the proposal, will increase or decrease the
total annual burden because the information is readily available to
advisers. Most of the comments on the amendments to Part 1A, Schedule
D, Section 7.B. concerned the qualified client question, Question
15(b), which we modified as discussed above.
The incorporation of umbrella registration into Form ADV will
codify a staff position and provide a method for certain private fund
advisers that operate as a single advisory business to file a single
registration form. Umbrella registration will only be available if the
filing adviser and each relying adviser advise only private funds and
clients in separately managed accounts that are qualified clients, as
defined in rule 205-3 under the Advisers Act, that are otherwise
eligible to invest in the private funds advised by the filing or a
relying adviser. The filing and relying advisers will also have to
satisfy certain requirements, including that each relying adviser is
controlled by or under common control with the filing adviser. There
has been staff guidance for single registration under defined
circumstances since 2012,\367\ and the amendments to Form ADV will
provide for umbrella registration and simplify the process of umbrella
registration for advisers that operate as a single advisory business.
We are adding a new schedule to Part 1A, Schedule R, that will need to
be filed with respect to each relying adviser, as well as a new
question to Schedule D, that will link a private fund reported on Form
ADV to the specific (filing or relying) adviser that advises it.
Schedule R will require identifying information, basis for Commission
registration, and ownership information about each relying adviser.
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\367\ See 2012 ABA Letter, supra footnote 5.
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We believe that much of the information we are requiring in
[[Page 60451]]
Schedule R will be readily available to private fund advisers because
it is information that they are already reporting either on Form ADV
filings for separate advisers or on a single Form ADV filing, in
reliance on the staff guidance. Accordingly, although these new
requirements will cause an increase in the information collected, the
increased burden should largely be attributable to data entry and not
data collection. Furthermore, some advisers who currently separately
file Form ADV for each of their advisers may cumulatively have a
reduced Form ADV burden by switching to umbrella registration. We also
believe that new filing advisers using umbrella registration will
readily have information available about their relying advisers,
because they are operating as a single advisory business. In addition,
filing advisers will be able to check a box indicating that the relying
adviser's address is the same as the filing adviser, rather than
provide the relying adviser's address. We did not receive comments on
the burdens specific to Schedule R.
There is no currently approved annual burden estimate for
completing Schedule R because it is a new Schedule. Taking into account
the scope of information we are requesting, our understanding that much
of the information is readily available and currently required on Form
ADV, and the fact that private fund advisers that file an umbrella
registration in reliance on staff guidance had on average three relying
advisers,\368\ we continue to estimate that advisers to private funds
that elect to rely on umbrella registration will spend on average 1
hour per filing adviser completing new Schedule R for the first time.
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\368\ Based on IARD system data as of May 16, 2016,
approximately 743 investment advisers rely on the 2012 ABA Letter to
file Form ADV on behalf of themselves and 2,587 relying advisers, an
average of approximately 3 relying advisers per filing adviser.
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c. Estimated Changes in Burden Related to Exempt Reporting Adviser
Reporting Requirements
Exempt reporting advisers are required to complete a limited number
of items in Part 1A of Form ADV (consisting of Items 1, 2.B., 3, 6, 7,
10, 11 and corresponding schedules), are not required to complete Part
2 and will not be eligible to file new Schedule R. The amendments to
Part 1A will revise only Items 1 and 7 for exempt reporting advisers.
We believe that most exempt reporting advisers are unlikely to be
required to do additional reporting in response to the new
requirements. In addition, the information required by these revisions
should be readily available to any adviser as part of their ongoing
operations and management of client assets.\369\ For instance, we
estimate that almost all exempt reporting advisers currently have five
or fewer offices (the number of offices currently required by Form ADV)
and thus will not have to provide information on additional
offices.\370\ Accordingly, we do not expect that the amendments will
increase or decrease the currently approved total annual burden
estimate of two hours per exempt reporting adviser initially completing
these items on Form ADV, other than Item 7.B. We also do not expect
that the amendments will increase or decrease the currently approved
total annual burden estimate of 1 hour per private fund per exempt
reporting adviser initially completing Item 7.B. and Section 7.B. of
Schedule D.
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\369\ One commenter suggested that it would be burdensome for
exempt reporting advisers to begin collecting information on the
qualified client status of their investors. As discussed above, we
have made revisions to address this concern. SBIA Letter.
\370\ Based on IARD system data as of May 16, 2016,
approximately 15 exempt reporting advisers reported on Form ADV that
they had five or more other offices.
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2. Annual Burden Estimates
a. Estimated Annual Burden Applicable to All Registered Investment
Advisers
i. Estimated Initial Hour Burden (Not Including Burden Applicable to
Private Funds) for First Year Adviser To Complete Form ADV (Part 1 and
Part 2)
We estimate that, as a result of the amendments to Form ADV Part 1A
discussed above, other than those applicable to private funds, the
average total collection of information burden per respondent will
increase 5 hours to 45.74 hours per adviser for the first year that an
adviser completes Form ADV (Part 1 and Part 2).
Approximately 12,024 investment advisers are currently registered
with the Commission.\371\ Not including private fund reporting, the
estimated aggregate annual burden applicable to these advisers will be
549,978 hours \372\ (60,120 hours of it attributable to the
amendments).\373\ As with the Commission's prior Paperwork Reduction
Act estimates for Form ADV, we believe that most of the paperwork
burden will be incurred in advisers' initial submission of the amended
Form ADV, and that over time this burden will decrease substantially
because the paperwork burden will be limited to updating
information.\374\ Amortizing the burden imposed by Form ADV over a
three-year period to reflect the anticipated period of time that
advisers will use the revised Form will result in an average annual
burden of an estimated 183,326 hours per year \375\ (20,040 hours per
year of it attributable to the amendments),\376\ or approximately 15.25
hours per year for each adviser currently registered with the
Commission.\377\
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\371\ Based on IARD system data as of May 16, 2016. We include
currently registered advisers in the estimated initial hour burden
calculation because, for purposes of estimating burdens under the
Paperwork Reduction Act, we assume that every new and existing
registered adviser completes an initial registration in a three year
period, which is the period after which estimates are required to be
renewed.
\372\ 45.74 hour per-adviser burden x 12,024 advisers = 549,978
hours.
\373\ 5 hour per-adviser additional burden x 12,024 advisers =
60,120 hours.
\374\ We discuss the burden for advisers making annual updating
amendments to Form ADV in Section iii below.
\375\ 549,978 hours/3 = 183,326 hours.
\376\ 60,120 hours/3 = 20,040 hours.
\377\ 183,326 hours/12,024 advisers = 15.25 hours.
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Based on IARD system data, we estimate that there will be
approximately 1,000 new investment advisers filing Form ADV with us
annually. Therefore, we estimate that the total annual aggregate burden
estimate applicable to these advisers for the first year that they
complete Form ADV but excluding private fund reporting requirements is
45,740 hours (1,000 advisers x 45.74 hours). Amortizing the burden
imposed by Form ADV for new registrants over a three-year period to
reflect the anticipated period of time that advisers will use the
revised Form will result in an average annual aggregate burden estimate
of 15,247 hours per year \378\ (1,667 of it attributable to the
amendments).\379\ We therefore estimate the total annual aggregate hour
burden to be 198,573 hours per year.\380\
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\378\ 45,740 hours/3 = 15,247 hours.
\379\ 5,000 hours/3 = 1,667 hours.
\380\ 15,247 hours for new registrants + 183,326 hours for
existing registrants = 198,573 hours.
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ii. Estimated Initial Hour Burden Applicable to Registered Advisers to
Private Funds
The amount of time that a registered adviser managing private funds
will incur to complete Item 7.B. and Section 7.B. of Schedule D will
vary depending on the number of private funds the adviser manages. Of
the advisers currently registered with us, we estimate that
approximately 4,469 registered advisers advise a total of 30,896
private funds, and, on average, 300 Commission-registered advisers
annually will make their initial filing with us reporting approximately
1,100
[[Page 60452]]
private funds.\381\ The currently approved annual burden estimate for
advisers making their initial filing in completing Item 7.B. and
Schedule D, Section 7.B. is 1 hour per private fund. As a result, we
estimate that the private fund reporting requirements that are
applicable to registered investment advisers will add 31,996 hours to
the overall annual aggregate burden estimate applicable to registered
advisers.\382\ As noted above, we believe most of the paperwork burden
will be incurred in connection with advisers' initial submission of
Form ADV, and that over time the burden will decrease substantially
because it will be limited to updating (instead of compiling)
information. Amortizing this burden over three years, as we did above
with respect to the initial filing of the rest of the form, results in
an annual aggregate average estimated burden of 10,665 hours per
year.\383\
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\381\ Based on IARD system data as of May 16, 2016. We include
existing funds of currently registered advisers in the estimated
initial hour burden calculation because, for purposes of estimating
burdens under the Paperwork Reduction Act, we assume that every
existing registered adviser completes an initial filing completing
Item 7.B. and Schedule D, Section 7.B. per fund in a three year
period, which is the period after which estimates are required to be
renewed.
\382\ 1 hour x 30,896 private funds = 30,896 hours. 1 hour x
1,100 private funds = 1,100 hours. 30,896 hours + 1,100 hours =
31,996 hours.
\383\ 31,996 hours/3 = 10,665 hours.
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We also are adding a new Schedule R to Form ADV for umbrella
registration. Of the advisers currently registered with us, we estimate
based on current Form ADV filings that approximately 743 registered
advisers currently submit a single Form ADV on behalf of themselves and
approximately 2,587 relying advisers.\384\ Taking into account the
scope of information we are requesting and our understanding that much
of the information is readily available and is already reported by
advisers, we estimate that advisers to private funds that elect to rely
on umbrella registration will spend 1 hour per filing adviser
completing new Schedule R. As a result, we estimate that umbrella
registration will add 743 \385\ hours to the annual burden estimate
applicable to registered advisers. We estimate that, on average, 51 SEC
registered advisers annually will make their initial filing with us as
filing advisers, increasing the overall annual burden for advisers to
private funds an additional 51 hours, or 794 hours in total. Amortizing
these hours for a three year period as with the rest of the burdens
associated with Form ADV, results in an annual aggregate average burden
of 265 additional hours per year.\386\
---------------------------------------------------------------------------
\384\ Based on IARD system data as of May 16, 2016.
\385\ 743 filing advisers x 1 hour per completing Schedule R =
743 hours.
\386\ 794 hours/3 = 265 hours.
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iii. Estimated Annual Burden Associated With Amendments, New Brochure
Supplements, and Delivery Obligations
The current approved collection of information burden for Form ADV
has three elements in addition to those discussed above: (1) The annual
burden associated with annual and other amendments to Form ADV; (2) the
annual burden associated with creating new Part 2 brochure supplements
for advisory employees throughout the year; and (3) the annual burden
associated with delivering codes of ethics to clients as a result of
the offer of such codes contained in the brochure. We anticipate that
our amendments to Form ADV will increase the currently approved annual
burden estimate associated with annual amendments to Form ADV from 6
hours to 8 hours per adviser, but will not impact interim updating
amendments to Form ADV.\387\
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\387\ Certain commenters were concerned about the burden on
advisers of updating social media information via interim updating
amendments. See BlackRock Letter; Oppenheimer Letter; SIFMA Letter.
As discussed in Section II.A.2.a., we clarified that we are limiting
the required social media reporting to an adviser's accounts on
publicly available social media platforms where the adviser controls
the content. We believe changes to such platforms will be less
frequent than changes, for example, to platforms where an adviser
does not control the content. Therefore, we do not believe that
updating social media reporting via interim updating amendments will
increase the currently approved annual burden estimate associated
with interim updating amendments.
---------------------------------------------------------------------------
We continue to estimate that, on average, each adviser filing Form
ADV through the IARD will likely amend its form two times during the
year. We estimate, based on IARD system data, that advisers, on
average, make one interim updating amendment (at an estimated 0.5 hours
per amendment) and one annual updating amendment each year. Our
estimate for the annual updating amendment in the Proposing Release was
7 hours per amendment each year. Based on the comments we received
regarding separately managed account reporting that are discussed
above,\388\ we are increasing the estimate to 8 hours per amendment
each year.\389\
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\388\ AIMA Letter; ASG Letter; IAA Letter; SIFMA Letter. See
also Adrian Day Letter; NRS Letter.
\389\ (12,024 advisers x 0.5 hours/other than annual amendment)
+ (12,024 advisers x 8 hours/annual amendment) = 102,204 hours.
---------------------------------------------------------------------------
In addition, the currently approved annual burden estimates are
that each investment adviser registered with us will, on average, spend
1 hour per year making interim amendments to brochure supplements,\390\
and an additional 1 hour per year to prepare new brochure supplements
as required by Part 2.\391\ The currently approved annual burden
estimate is that advisers spend an average of 1.3 hours annually to
meet obligations to deliver codes of ethics to clients upon
request.\392\ We are not changing these estimates as the amendments do
not affect these requirements. The increase in the annual burden
estimate associated with annual amendments to Form ADV and the increase
in the number of registered investment advisers since the last approval
of this collection, increase the total annual burden for advisers
registered with us attributable to amendments, brochure supplements and
obligations to deliver codes of ethics to 141,883 hours.\393\
---------------------------------------------------------------------------
\390\ 12,024 hours attributable to interim amendments to the
brochure supplements = 12,024 advisers x 1 hour = 12,024 hours.
\391\ 12,024 hours attributable to new brochure supplements =
12,024 advisers x 1 hour = 12,024 hours.
\392\ 15,631 hours for the delivery of codes of ethics = 12,024
advisers x 1.3 hours = 15,631 hours.
\393\ 102,204 hours + 12,024 hours + 12,024 hours + 15,631 hours
= 141,883 hours.
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iv. Estimated Annual Cost Burden
The currently approved total annual collection of information
burden estimate for Form ADV has a one-time initial cost for outside
legal and compliance consulting fees in connection with the initial
preparation of Part 2 of Form ADV. We do not anticipate that the
amendments we are adopting to Form ADV will affect the per adviser cost
burden estimates for outside legal and compliance consulting fees. In
addition to the estimated legal and compliance consulting fees,
investment advisers of private funds incur costs with respect to the
requirement for investment advisers to report the fair value of private
fund assets. We did not receive any comments regarding these specific
costs.
We expect that 1,000 new advisers will register annually with the
Commission. We estimate that the initial cost related to preparation of
Part 2 of Form ADV will be $4,400 for legal services and $5,000 for
compliance consulting services, in each case, for those advisers who
engage legal counsel or consultants. We anticipate that a quarter of
these advisers will seek the help of outside legal services and half
will seek the help of compliance consulting services. Accordingly, we
estimate that 250 of these advisers will use outside legal services,
for a total annual aggregate cost burden of
[[Page 60453]]
$1,100,000,\394\ and 500 advisers will use outside compliance
consulting services, for a total annual aggregate cost burden of
$2,500,000,\395\ resulting in a total annual aggregate cost burden
among all respondents of $3,600,000 for outside legal and compliance
consulting fees related to drafting narrative brochures.\396\
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\394\ 25% x 1000 SEC registered advisers = approximately 250
advisers. $4,400 for legal services x 250 advisers = $ 1,100,000.
\395\ 50% x 1000 SEC registered advisers = 500 advisers. $5,000
for consulting services x 500 advisers = $2,500,000.
\396\ $1,100,000 + $2,500,000 = $3,600,000.
---------------------------------------------------------------------------
We estimate that 6% of registered advisers have at least one
private fund client that may not be audited. These advisers therefore
may incur costs to fair value their private fund assets. Based on IARD
system data as of May 16, 2016, 4,469 registered advisers currently
advise private funds. We therefore estimate that approximately 268
registered advisers may incur costs of $37,625 each on an annual basis,
for an aggregate annual total cost of $10,083,500.\397\
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\397\ 268 advisers x $37,625 = $10,083,500.
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Together, we estimate that the total cost burden among all
respondents for outside legal and compliance consulting fees related to
third party or outside valuation services and for drafting outside
legal and compliance consulting fees to be $13,683,500.\398\
---------------------------------------------------------------------------
\398\ $3,600,000 + $10,083,500 = $13,683,500.
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b. Estimated Annual Burden Applicable to Exempt Reporting Advisers
i. Estimated Initial Hour Burden
Based on IARD system data as of May 16, 2016, there are
approximately 3,248 exempt reporting advisers currently filing reports
with the SEC.\399\ The paperwork burden applicable to these exempt
reporting advisers consists of the burden attributable to completing a
limited number of items in Form ADV Part 1A as well as the burden
attributable to the private fund reporting requirements of Item 7.B.
and Section 7.B. of Schedule D.
---------------------------------------------------------------------------
\399\ Based on IARD system data as of May 16, 2016. We include
existing exempt reporting advisers and their private funds in the
estimated initial hour burden calculation because, for the purpose
of estimating burdens under the Paperwork Reduction Act, we assume
that every new and existing exempt reporting adviser completes an
initial Form ADV in a three year period, which is the period after
which estimates are required to be renewed.
---------------------------------------------------------------------------
The currently approved estimate of the average total collection of
information burden per exempt reporting adviser for the first year that
an exempt reporting adviser completes a limited subset of Part 1 of
Form ADV, other than Item 7.B. and Section 7.B. of Schedule D, is 2
hours. As discussed above, we do not anticipate that our amendments to
Form ADV will affect the per exempt reporting adviser burden estimate.
Based on IARD system data, we estimate that there will be 500 new
exempt reporting advisers filing Form ADV annually. Therefore, we
estimate that the total aggregate annual burden applicable to the
existing and new exempt reporting advisers for the first year that they
complete Form ADV but excluding private fund reporting requirements
increases to 7,496 hours.\400\ Amortizing the burden imposed by Form
ADV over a three-year period to reflect the anticipated period of time
that advisers will use the revised Form ADV results in an average
annual aggregate burden estimate of 2,499 hours per year.\401\
---------------------------------------------------------------------------
\400\ 2 hours x (3,248 reporting exempt reporting advisers + 500
new exempt reporting advisers) = 7,496 hours.
\401\ 7,496 hours/3 = 2,499 hours.
---------------------------------------------------------------------------
As discussed above, we estimate the burden of completing Item 7.B.
and Section 7.B. of Schedule D to be 1 hour per private fund. We do not
anticipate that our amendments to Form ADV will affect the per exempt
reporting adviser burden of completing Item 7.B. and Section 7.B. of
Schedule D. Based on IARD system data as of May 16, 2016, we estimate
that, on average, the 3,248 exempt reporting advisers report 11,915
funds. In addition, we estimate that the 500 new exempt reporting
advisers making their initial filing will report approximately 1,000
funds, resulting in a total aggregate annual burden of 12,915
hours.\402\ Amortizing this total burden over three years as we did
above for registered advisers results in an average annual aggregate
burden estimate of 4,305 hours per year,\403\ or approximately 1 hour
per year, on average, for each exempt reporting adviser.\404\
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\402\ 11,915 funds + 1,000 funds = 12,915 funds. 12,915 x 1 hour
= 12,915 hours.
\403\ 12,915 hours/3 years = 4,305 hours per year.
\404\ 4,305 hours per year/3,748 exempt reporting advisers = 1.1
hours per year.
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ii. Estimated Annual Burden Associated With Amendments and Final
Filings
In addition to the burdens associated with initial completion and
filing of the portion of the form that exempt reporting advisers are
required to prepare, we estimate that, based on IARD system data, each
exempt reporting adviser will amend its form 2 times per year. On
average, these consist of one interim updating amendment (at an
estimated 0.5 hours per amendment) \405\ and one annual updating
amendment (at an estimated 1 hour per amendment) \406\ each year. In
addition, we anticipate 200 final filings by exempt reporting advisers
annually (at an estimated 0.1 hours per filing).\407\ We do not
anticipate that our amendments to Form ADV will affect the per exempt
reporting adviser burden for amendments or final filings. However,
based on the increase in the number of exempt reporting advisers, the
total annual burden associated with exempt reporting advisers filing
amendments and final filings has increased to 4,892 hours.\408\
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\405\ 3,248 exempt reporting advisers x .5 hours = 1,624 hours.
\406\ 3,248 exempt reporting advisers x 1 hour = 3,248 hours.
\407\ 200 final filings x 0.1 hours = 20 hours.
\408\ 1,624 hours + 3,248 hours + 20 hours = 4,892 hours. Exempt
reporting advisers are not required to complete Part 2 of Form ADV
and so will not incur an hour burden to prepare new brochure
supplements or the cost for preparation of the brochure. Exempt
reporting advisers also do not have an obligation to deliver codes
of ethics to clients when requested as required by Part 2 of Form
ADV.
---------------------------------------------------------------------------
3. Total Revised Burdens
The revised total annual aggregate collection of information burden
for SEC registered advisers to file and complete the revised Form ADV
(Parts 1 and 2), including the initial burden for both existing and
anticipated new registrants, private fund reporting, plus the burden
associated with filing amendments to the form, preparing brochure
supplements and delivering codes of ethics to clients, is estimated to
be approximately 351,386 hours per year, for a monetized total of
approximately $89,427,737.\409\
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\409\ 198,573 hours per year attributable to initial preparation
of Form ADV + 10,665 hours per year attributable to initial private
fund reporting requirements + 265 hours per year for initial
umbrella registration + 141,883 hours per year attributable to
filing amendments, brochure supplements and obligations to deliver
codes of ethics = 351,386 hours. One commenter stated that the work
of compliance is generally carried out by the Chief Compliance
Officer with limited assistance from others. PCA Letter. However,
based on our experience, we expect that at most Commission
registered advisers, the performance of this function will most
likely be equally allocated between a senior compliance examiner and
a compliance manager, or persons performing similar functions. Data
from the SIFMA Management and Professional Earnings Report, modified
by Commission staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead, suggest that costs for these
positions are $221 and $288 per hour, respectively. (175,693 hours x
$221) + (175,693 hours x $288) = $89,427,737.
---------------------------------------------------------------------------
The revised total annual collection of information burden for
exempt reporting advisers to file and complete the required Items of
Part 1A of Form
[[Page 60454]]
ADV, including the burdens associated with private fund reporting,
amendments to the form and final filings, will be approximately 11,696
hours per year, for a monetized total of $2,976,632.\410\
---------------------------------------------------------------------------
\410\ 2,499 hours per year attributable to initial preparation
of Form ADV + 4,305 hours per year attributable to initial private
fund reporting requirements + 4,892 hours per year for amendments
and final filings = 11,696 hours. We expect that the performance of
this function will most likely be equally allocated between a senior
compliance examiner and a compliance manager, or persons performing
similar functions. Data from the SIFMA Management and Professional
Earnings Report, modified by Commission staff to account for an
1,800-hour work-year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead,
suggest that costs for these positions are $221 and $288 per hour,
respectively. (5,848 x $221) + (5,848 x $288) = $2,976,632.
---------------------------------------------------------------------------
We estimate that with today's amendments to Form ADV, the revised
total aggregate annual hour burden for the form will be approximately
363,082 hours and the monetized total will be approximately
$92,404,369.\411\ This is an increase of 208,680 hours and $55,733,942
from the currently approved annual aggregate burden estimates,\412\
which is attributable primarily to the currently approved burden
estimates not considering the amortized annual burden of Form ADV on
existing registered advisers and exempt reporting advisers; but also to
the larger registered investment adviser and exempt reporting adviser
population since the most recent approval, adjustments for inflation,
and the amendments to Form ADV. The resulting blended average per
adviser burden for Form ADV is 23.77 hours (for a monetized total of
$6,051),\413\ which consists of an average annual burden of 29.22 hours
\414\ for each of the estimated 12,024 SEC registered advisers, and
3.60 hours \415\ for each of the estimated 3,248 exempt reporting
advisers.
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\411\ 351,386 hours + 11,696 hours = 363,082 hours. $89,427,737
+ $2,976,632 = $92,404,369.
\412\ 363,082 hours-154,402 hours = 208,680 hours. $92,404,369-
$36,670,427 (currently approved monetized burden estimate) =
$55,733,942.
\413\ 363,082 hours/(12,024 registered advisers + 3,248 exempt
reporting advisers) = 23.77 hours. $92,404,369/(12,024 registered
advisers + 3,248 exempt reporting advisers) = $6,051.
\414\ 351,386 hours/12,024 registered advisers = 29.22 hours.
\415\ 11,696 hours/3,248 exempt reporting advisers = 3.60 hours.
---------------------------------------------------------------------------
Registered investment advisers are also expected to incur an annual
cost burden of $13,683,500, an increase of $10,083,500 from the current
approved cost burden estimate of $3,600,000. The increase in annual
cost burden is attributable to the currently approved burden not
considering the cost to advisers to fair value private fund assets.
B. Rule 204-2
Rule 204-2 (OMB Control No. 3235-0278) requires investment advisers
registered, or required to be registered under section 203 of the Act,
to keep certain books and records relating to their advisory business.
The collection of information under rule 204-2 is necessary for the
Commission staff to use in its examination and oversight program. The
information provided to the Commission in connection with staff
examinations, investigations and oversight programs would be kept
confidential subject to the provisions of applicable law. The
collection of information is mandatory.
The amendments to rule 204-2 will require investment advisers to
make and keep the following records: (i) Documentation necessary to
demonstrate the calculation of the performance the adviser distributes
to any person, and (ii) all written communications received or sent
relating to the adviser's performance.
The currently approved total annual burden for rule 204-2 is based
on an estimate of 10,946 registered advisers subject to rule 204-2 and
an estimated average burden of 181.45 burden hours each year per
adviser, for a total annual aggregate burden estimate of 1,986,152
hours. Based upon updated IARD system data as of May 16, 2016, the
approximate number of investment advisers is 12,024. As a result of the
increase in the number of advisers registered with the Commission since
the current total annual burden estimate was approved, the total burden
estimate has increased by 195,603 hours.\416\ We estimate that most
advisers provide, or seek to provide, performance information to their
clients. Under the amendments, each adviser will be required to retain
the records in the same manner, and for the same period of time, as
other books and records under the rule.\417\ We believe based on staff
experience, and several commenters confirmed,\418\ that the
documentation necessary to support the performance calculations is
customarily maintained, or required to be maintained by advisers
already in account statements or portfolio management systems. We also
believe that most advisers already maintain this information in their
books and records, in order to show compliance with the Advisers Act
advertising rule, rule 206(4)-1. In the Proposing Release, we estimated
that the proposed amendments to rule 204-2 would increase the burden by
approximately .5 hours per adviser annually. We received several
comments suggesting that our estimated burden increase was
significantly too low.\419\ While we continue to believe that most
advisers currently maintain this information, after considering the
commenters' concerns, we now estimate that the amendments to rule 204-2
will increase the burden by approximately 1.5 hours per adviser
annually for a total annual aggregate increase of 18,036 hours.\420\
The revised annual aggregate burden estimate will be 2,199,791
hours.\421\ The revised average burden estimate of the recordkeeping
requirements under rule 204-2 per SEC-registered adviser will be
approximately 183 hours per year.\422\ The burden may be less than 1.5
hours for those advisers that currently maintain this information, and
we acknowledge that the burden may be greater than 1.5 hours for
advisers that frequently provide performance information to clients and
do not currently maintain this information. We believe that, on
average, 1.5 hours is an appropriate estimate for this collection of
information.
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\416\ 12,024 advisers x 181.45 hours = 2,181,755 hours.
2,181,755 hours - 1,986,152 hours = 195,603 hours.
\417\ Specifically, the records must be maintained in an easily
accessible place for at least five years from the end of the fiscal
year during which the last entry was made in such record, the first
two years in an appropriate office of the investment adviser. See
rule 204-2(e)(1).
\418\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA
Letter.
\419\ ACG Letter; Anonymous Letter (estimates a training burden
of 4-8 hours per effected employee in the first year; estimates that
there will be additional expenses for data analysis and storage);
PEGCC Letter (argues that, with respect to the proposed amendments
to rule 204-2, the Commission significantly understated the burden
on advisers and presented little evidence to support its burden
estimate). See ASG Letter.
\420\ 12,024 advisers x 1.5 hours = 18,036 hours.
\421\ 1,986,152 (current approved burden) + 195,603 (burden for
additional registrants) + 18,036 (burden for amendments) = 2,199,791
hours.
\422\ 2,199,791 hours / 12,024 advisers = 183 hours.
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Advisers will likely use a combination of compliance clerks and
general clerks to make and keep the information and records required
under the rule. The currently approved total annual aggregate cost
burden is $108,708,557.10. We estimate the hourly wage for compliance
clerks to be $65 per hour, including benefits, and the hourly wage for
general clerks to be $58 per hour, including benefits.\423\ For
[[Page 60455]]
each adviser, 183 annual burden hours will be required to make and keep
the information and records required under the rule. We anticipate that
compliance clerks will perform an estimated 32 hours of this work, and
general clerks will perform the remaining 151 hours. The total annual
cost per respondent therefore will be an estimated $10,838,\424\ for a
total annual aggregate burden cost estimate of approximately
$130,316,112,\425\ an increase of $21,607,555 from the currently
approved total annual aggregate cost per respondent.\426\ The increase
in cost is attributable to a larger registered investment adviser
population since the most recent PRA approval, an adjustment for
inflation in the hourly wage estimates for a compliance clerk and
general clerk, and the rule 204-2 amendments discussed in this Release.
---------------------------------------------------------------------------
\423\ Our hourly wage rate estimate for a compliance clerk and
general clerk is based on data from the SIFMA Office Salaries in the
Securities Industry Report 2013 (``SIFMA Office Salaries Report''),
modified by Commission staff to account for an 1,800-hour work-year
and inflation, and multiplied by 2.93, to account for bonuses, firm
size, employee benefits and overhead.
\424\ (32 hours per compliance clerk x $65) + (151 hours per
general clerk x $58) = ($2,080 + $8,758) = $10,838.
\425\ $10,838 per adviser x 12,024 advisers = approximately
$130,316,112.
\426\ $130,316,112 - $108,708,557 = $21,607,555.
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VI. Final Regulatory Flexibility Analysis
The Commission has prepared the following Final Regulatory
Flexibility Act Analysis, in accordance with section 4(a) of the
Regulatory Flexibility Act, in relation to our amendments to Form ADV
and rule 204-2 and our technical amendments to certain other rules
under the Advisers Act.\427\ We prepared an Initial Regulatory
Flexibility Analysis (``IRFA'') in the Proposing Release.\428\
---------------------------------------------------------------------------
\427\ 5 U.S.C. 604(a).
\428\ See Proposing Release, supra footnote 3 at Section V.
---------------------------------------------------------------------------
A. Need for and Objectives of the Amendments
We are adopting amendments to Form ADV that are designed to provide
the Commission with additional information about registered investment
advisers, including information about separately managed accounts,
provide for umbrella registration for multiple investment advisers
operating as a single advisory business, and provide technical,
clarifying and other amendments to certain Form ADV provisions. The
amendments to Form ADV will improve the depth and quality of the
information provided by investment advisers to the Commission and the
public.
We are also amending the Advisers Act books and records rule to
require advisers to make and keep supporting documentation that
demonstrates performance calculations or rates of return in any written
communications that the adviser circulates or distributes, directly or
indirectly, to any person. We believe that the amendments to the books
and records rule will improve investor protections by providing useful
information in examining and evaluating advisers' performance claims.
Finally, we are adopting technical amendments to certain rules
under the Advisers Act to remove transition provisions where the
transition process is complete.
B. Significant Issues Raised by Public Comments
The Commission is sensitive to the burdens that the Form ADV and
rule amendments may have on small advisers. In the Proposing Release,
we requested comment on matters discussed in the IRFA. In particular,
we sought comments on the number of small entities, particularly small
advisers, to which the amendments to Form ADV and Advisers Act rules
would apply, and the impact of those amendments on the small entities,
including whether the effects would be economically significant.
The Commission received one comment letter specifically addressing
the IRFA \429\ in addition to several comment letters that discussed
the impact of the proposed amendments to Form ADV on smaller
advisers.\430\ With respect to the reporting on Form ADV regarding
separately managed accounts, several commenters suggested decreasing
the burden on small advisers by increasing the threshold for reporting
derivatives and borrowings information in Schedule D, Section 5.K.(2)
to $500 million from the proposed $150 million.\431\ As discussed
above, we are persuaded by commenters that this is a sensible
accommodation that would allow us to meet our regulatory objectives
while alleviating reporting burdens on smaller advisers, and have
raised the minimum threshold for reporting information about the use of
borrowings and derivatives in separately managed accounts to advisers
with at least $500 million in separately managed account regulatory
assets under management, from the proposed threshold of $150
million.\432\ A commenter also suggested not requiring advisers with
less than $150 million in separately managed account assets to report
any separately managed account information, including in Sections
5.K.(1) and 5.K.(3).\433\ As discussed in Section II.A.1. of this
Release, we recognize that this reporting will impose some burden on
all advisers with separately managed accounts, but we believe that
gathering this information is important for us to gain a full
understanding of assets held in separately managed accounts managed by
investment advisers of different sizes. We also have limited both the
scope of information to be reported and the frequency of reporting,
which lessens the burden on small advisers.
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\429\ PCA Letter.
\430\ Adrian Day Letter; AIMA Letter; Diercks Letter; IAA
Letter; SBIA Letter; Schwab & Co. Letter.
\431\ IAA Letter; NYSBA Committee Letter; Schwab & Co. Letter.
\432\ See Amended Form ADV, Part 1A, Schedule D, Section
5.K.(2).
\433\ AIMA Letter; see also ASG Letter (suggesting establishing
a minimum regulatory assets under management threshold above which
reporting requirements would be imposed).
---------------------------------------------------------------------------
One commenter described more generally the burdens of the
amendments to Form ADV on smaller private fund advisers.\434\ Other
commenters noted that smaller advisers may not have additional staff to
meet any increased burdens in reporting, and that smaller advisers may
not have the staffing that we assume in calculating monetary burdens on
advisers.\435\ Another commenter noted that the requirement to report
information about additional offices may have a disproportionate impact
on smaller advisers.\436\
---------------------------------------------------------------------------
\434\ See SBIA Letter.
\435\ Adrian Day Letter; Diercks Letter; PCA Letter.
\436\ NRS Letter.
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With respect to the amendments that we proposed to the Books and
Records rule, one commenter noted that while the amendments were not
themselves burdensome, when aggregated with other recordkeeping
obligations, could lead to overall compliance burdens for smaller
advisers.\437\ While we acknowledge commenters' concerns, records from
advisers of all sizes are required for our staff to be able to conduct
its oversight of advisers, including examinations and investigations.
Further, based on our staff's experience and the information provided
by several commenters,\438\ we believe that most advisers already
maintain this information. Thus, we are adopting the amendments largely
as proposed.
---------------------------------------------------------------------------
\437\ SBIA Letter.
\438\ See, e.g., ABA Committee Letter; Morningstar Letter; PCA
Letter.
---------------------------------------------------------------------------
With respect to the amendments to Form ADV and the Advisers Act
rules generally, we believe that they will improve the depth and
quality of information provided by investment advisers to the
Commission and the public and our oversight of advisers.
[[Page 60456]]
Information about advisers of all sizes is required for the Commission
and its staff to perform their roles in overseeing advisers.
Accordingly, we are not modifying the reporting requirements for
smaller advisers.
C. Small Entities Subject to the Rule and Rule Amendments
The amendments to Form ADV and the Advisers Act rules affect all
advisers registered with the Commission and exempt reporting advisers,
including small entities. Under Commission rules, for the purposes of
the Advisers Act and the Regulatory Flexibility Act, an investment
adviser generally is a small entity if it: (1) Has assets under
management having a total value of less than $25 million; (2) did not
have total assets of $5 million or more on the last day of the most
recent fiscal year; and (3) does not control, is not controlled by, and
is not under common control with another investment adviser that has
assets under management of $25 million or more, or any person (other
than a natural person) that had total assets of $5 million or more on
the last day of its most recent fiscal year.\439\
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\439\ Rule 0-7(a) under the Advisers Act.
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Our rule and Form ADV amendments will not affect most advisers that
are small entities (``small advisers'') because they are generally
registered with one or more state securities authorities and not with
us. Under section 203A of the Advisers Act, most small advisers are
prohibited from registering with the Commission and are regulated by
state regulators. Based on IARD system data, we estimate that as of May
16, 2016, approximately 526 advisers that are small entities are
registered with the Commission.\440\ Because these advisers are
registered, they, like all SEC-registered investment advisers, will all
be subject to the amendments to Form ADV, rule 204-2 and other Advisers
Act rules.
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\440\ Based on SEC-registered investment adviser responses to
Form ADV, Item 5.F and Item 12.
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The only small entity exempt reporting advisers that are subject to
the amendments are exempt reporting advisers that maintain their
principal office and place of business in Wyoming or outside the United
States. Advisers with less than $25 million in assets under management
generally are prohibited from registering with us unless they maintain
their principal office and place of business in Wyoming or outside the
United States. Exempt reporting advisers are not required to report
regulatory assets under management on Form ADV and therefore we do not
have a precise number of exempt reporting advisers that are small
entities. Exempt reporting advisers are required to report in Part 1A,
Schedule D the gross asset value of each private fund they manage.\441\
Based on responses to that question, we estimate that there is
approximately 1 exempt reporting adviser with its principal office and
place of business in Wyoming that meets the definition of small entity.
Advisers with their principal office and place of business outside the
United States may have additional assets under management other than
what is reported in Schedule D. Based on IARD filings, approximately
14.3% of registered investment advisers with their principal office and
place of business outside the U.S. are small entities. Based on IARD
system data as of May 16, 2016, there are approximately 1,428 exempt
reporting advisers with their principal office and place of business
outside the U.S. We estimate that 14.3% of those advisers,
approximately 204 exempt reporting advisers, are small entities.
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\441\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A.,
Question 11.
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The amendments to Form ADV and rule 204-2 impose certain reporting,
recordkeeping, and compliance requirements on all Commission-registered
advisers, including small advisers. All Commission-registered small
advisers are required to file Form ADV and include the new information
required by the amendments, and all Commission-registered small
advisers are subject to the amended recordkeeping requirements. Our
technical amendments to other Advisers Act rules do not impose
different reporting, recordkeeping, or other compliance requirements on
small advisers.
Form ADV Amendments
The amendments to Form ADV require registered investment advisers
to report different or additional information than what is currently
required. Approximately 526 small advisers currently registered with us
are subject to these requirements. We expect these 526 small advisers
to spend, on average, 5 hours to respond to the new and amended
questions, not including items relating to private fund reporting,
which is discussed below.\442\ We expect the aggregate cost to small
advisers associated with this process is $669,335.\443\
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\442\ See Section V. of this Release.
\443\ We expect that performance of this function will most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the SIFMA Management and
Professional Earnings Report, modified by Commission staff to
account for an 1,800-hour work year and inflation, and multiplied by
5.35 to account for bonuses, firm size, employee benefits, and
overhead, suggest that costs for these positions are $221 and $288
per hour, respectively. 526 small advisers x 5 hours = 2,630 hours.
[1,315 hours x $221 = $290,615] + [1,315 hours x $288 = $378,720] =
$669,335.
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In addition, of these 526 small advisers, we estimate that 3 small
advisers currently rely on the 2012 ABA Letter to act as filing
advisers for their relying advisers.\444\ We expect that our changes to
codify umbrella registration will take 3 hours \445\ in the aggregate,
at a cost to small advisers of $764.\446\ We do not know how many
additional small advisers will use umbrella registration as
incorporated into Form ADV.
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\444\ Based on IARD system data as of May 16, 2016.
\445\ For purposes of the Paperwork Reduction Act, we estimated
in Section V of this Release that amendments to codify umbrella
registration will take an additional 1 hour per filing adviser.
\446\ As discussed in connection with the Paperwork Reduction
Act, we expect that performance of this function will most likely be
equally allocated between a senior compliance examiner and a
compliance manager. Data from the SIFMA Management and Professional
Earnings Report, modified by Commission staff to account for an
1,800-hour work year and inflation, and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead,
suggest that costs for these positions are $221 and $288 per hour,
respectively. 3 filing advisers x 1 hour = 3 hour. [1.5 hours x $221
= $332] + [1.5 hours x $288 = $432] = $764.
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We do not estimate any increase or decrease in burden related to
our amendments for small private fund advisers, other than the hours
related to Schedule R, or for exempt reporting advisers. The total
estimated costs associated with our amendments to Form ADV that we
expect will be borne by small advisers is $670,099.\447\
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\447\ $669,335 + $764 = $670,099. These costs are discussed in
Paperwork Reduction Act Analysis in Section V. of this Release.
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Amendments to Books and Records Rule
Our amendments to rule 204-2's performance information
recordkeeping provisions require investment advisers to make and keep
the following records: (i) Documentation necessary to demonstrate the
calculation of the performance the adviser distributes to any person,
and (ii) all written communications received or sent relating to the
adviser's performance. These amendments will create reporting,
recordkeeping, and other compliance requirements for small advisers. As
discussed in the Paperwork Reduction Act Analysis in Section V. above,
the amendments to rule 204-2 will increase the burden by
[[Page 60457]]
approximately 1.5 hours per adviser. We expect the aggregate cost to
small advisers associated with our amendments is $46,700.\448\
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\448\ As discussed in connection with the Paperwork Reduction
Act, we expect that performance of this function will most likely be
allocated between compliance clerks and general clerks with
compliance clerks performing 17% of the function and general clerks
performing 83% of the function. Data from the SIFMA Office Salaries
Report modified by Commission staff to account for an 1,800-hour
work year and inflation, and multiplied by 2.93 to account for
bonuses, firm size, employee benefits, and overhead, suggest that
costs for these positions are $65 per hour and $58 per hour,
respectively. 526 small advisers x 1.5 hours = 789 hours. [0.17 x
789 hours x $65 = $8,718] + [0.83 x 789 hours x $58 = $37,982] =
$46,700.
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E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entities. In
connection with the Form ADV and rule amendments, the Commission
considered the following alternatives: (i) The establishment of
differing compliance or reporting requirements that take into account
the resources available to small advisers; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the Form ADV and rule amendments for such small
entities; (iii) the use of performance rather than design standards;
and (iv) an exemption from coverage of the Form ADV and rule
amendments, or any part thereof, for such small entities.
Regarding the first and second alternatives, the adopted amendments
require reporting on separately managed accounts on Schedule 5.K.(2) of
Form ADV only for advisers with $500 million or more of regulatory
assets under management attributable to separately managed accounts.
Further, we require semi-annual information filed annually for those
advisers with regulatory assets under management attributable to
separately managed accounts of at least $10 billion, and annual
information for other advisers.\449\ Requiring no reporting on these
items for advisers with less than $500 million, and less detailed
reporting for advisers with less than $10 billion, is designed to
balance our regulatory needs for this type of information while seeking
to minimize the reporting burden on advisers that manage a smaller
amount of separately managed account assets where appropriate.
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\449\ Amended Form ADV, Part 1A, Schedule D, Sections 5.K.(1).
---------------------------------------------------------------------------
Regarding the first and fourth alternatives for the other
amendments to Form ADV and Advisers Act rules, we do not believe that
different compliance or reporting requirements or an exemption from
coverage of the Form ADV and rule amendments, or any part thereof, for
small entities, would be appropriate. Information about advisers of all
sizes is required for the Commission and its staff to perform their
role in overseeing investment advisers. Accordingly, we are not
modifying the reporting requirements for smaller advisers.
Regarding the second alternative for the other amendments to Form
ADV and the Advisers Act rules, we considered whether further
clarification, consolidation, or simplification of the compliance
requirements was feasible or necessary. In response to commenters, we
clarified certain instructions and items, which apply to all advisers
filing Form ADV. The remaining Form ADV amendments do not change that
all SEC-registered advisers use a single form, Form ADV, and an
existing filing system, IARD, for reporting and registration purposes,
and this does not change for small entities. With respect to the rule
204-2 amendments, we believe that the same requirements should apply to
all advisers to permit our staff to more effectively examine them.
Regarding the third alternative, we considered using performance
rather than design standards with respect to the amendments to Form ADV
and rule 204-2 but, for the Commission and its staff to perform their
role in overseeing advisers, advisers must provide certain registration
information and maintain books and records in a uniform and
quantifiable manner so that it is useful to our regulatory and
examination program.
VII. Statutory Authority
The Commission is adopting amendments to Form ADV under section
19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a)
and 28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a)
and 78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15
U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940
[15 U.S.C. 80a-37(a)], and section 203(c)(1), 204 and 211(a) of the
Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1), 80b-4, and 80b-
11(a)]. The Commission is amending rule 204-2 pursuant to the authority
set forth in sections 204 and 211 of the Advisers Act [15 U.S.C. 80b-4
and 80b-11]. The Commission is amending rule 202(a)(11)(G)-1 pursuant
to authority in sections 202(a)(11)(G) and 206A of the Advisers Act [15
U.S.C. 80b-2(a)(11)(G) and 80b-6A]. The Commission is amending rule
203-1 pursuant to authority in section 206A of the Advisers Act [15
U.S.C. 80b-6A]. The Commission is rescinding rule 203A-5 and amending
rule 204-1 pursuant to authority in sections 204 and 211(a) of the
Advisers Act [15 U.S.C. 80b-4 and 80b-11(a)]. The Commission is
amending rule 204-3 pursuant to authority in sections 204, 206(4) and
211(a) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(4) and 80b-11(a)].
List of Subjects in 17 CFR Parts 275 and 279
Reporting and recordkeeping requirements; Securities.
Text of Rule and Form Amendments
For the reasons set forth in the preamble, title 17, chapter II of
the Code of Federal Regulations is amended as follows.
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
0
1. The general authority citation for part 275 continues to read as
follows, and the sectional authority for Sec. 275.230A-5 is removed.
Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
Sec. 275.202(a)(11)(G)-1 [Amended]
0
2. Amend Sec. 275.202(a)(11)(G)-1 by removing paragraph (e).
0
3. Section 275.203-1 is amended by:
0
a. In the first sentence of paragraph (a) removing the phrase ``Subject
to paragraph (b), to'' and adding in its place ``To'';
0
b. Removing paragraph (b);
0
c. In the NOTE TO PARAGRAPHS (a) AND (b), revising the paragraph
heading;
0
d. Redesignating paragraphs (c) and (d) as paragraphs (b) and (c); and
0
e. Removing paragraph (e).
The revision reads as follows:
Sec. 275.203-1 Application for investment adviser registration.
(a) * * *
NOTE TO PARAGRAPH (a): * * *
* * * * *
Sec. 275.203A-5 [Removed and Reserved]
0
4. Section 275.203A-5 is removed and reserved.
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Sec. 275.204-1 [Amended]
0
5. Section 275.204-1 is amended by:
0
a. In the first sentence of paragraph (b)(1) removing the phrase
``Subject to paragraph (c) of this section, you'' and adding in its
place ``You'';
0
b. Removing paragraph (c); and
0
c. Redesignating paragraphs (d) and (e) as paragraphs (c) and (d).
0
6. Section 275.204-2 is amended by:
0
a. Revising paragraph (a)(7); and
0
b. In paragraph (a)(16) removing the phrase ``to 10 or more persons''
and adding in its place ``to any person''.
The revision reads as follows:
Sec. 275.204-2 Books and records to be maintained by investment
advisers.
(a) * * *
(7) Originals of all written communications received and copies of
all written communications sent by such investment adviser relating to:
(i) Any recommendation made or proposed to be made and any advice
given or proposed to be given;
(ii) Any receipt, disbursement or delivery of funds or securities;
(iii) The placing or execution of any order to purchase or sell any
security;
(iv) The performance or rate of return of any or all managed
accounts or securities recommendations: Provided, however:
(A) That the investment adviser shall not be required to keep any
unsolicited market letters and other similar communications of general
public distribution not prepared by or for the investment adviser, and
(B) That if the investment adviser sends any notice, circular or
other advertisement offering any report, analysis, publication or other
investment advisory service to more than 10 persons, the investment
adviser shall not be required to keep a record of the names and
addresses of the persons to whom it was sent; except that if such
notice, circular or advertisement is distributed to persons named on
any list, the investment adviser shall retain with the copy of such
notice, circular or advertisement a memorandum describing the list and
the source thereof.
* * * * *
Sec. 275.204-3 [Amended]
0
7. Section 275.204-3 is amended by:
0
a. Removing paragraph (g); and
0
b. Redesignating paragraph (h) as paragraph (g).
PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940
0
8. The authority citation for Part 279 continues to read as follows:
Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-
1, et seq.
0
9. Form ADV [referenced in Sec. 279.1] is amended by:
0
a. In the instructions to the form, revising the sections entitled
``Form ADV: General Instructions.'' The revised version of Form ADV:
General Instructions is attached as Appendix A;
0
b. In the instructions to the form, revising the section entitled
``Form ADV: Instructions for Part 1A.'' The revised version of Form
ADV: Instructions for Part 1A is attached as Appendix B;
0
c. In the instructions to the form, revising the section entitled
``Form ADV: Glossary of Terms.'' The revised version of Form ADV:
Glossary of Terms is attached as Appendix C;
0
d. In the form, revising Part 1A. The revised version of Form ADV, Part
1A, is attached as Appendix D.
Note: The text of Form ADV does not and the amendments will not
appear in the Code of Federal Regulations.
By the Commission.
Dated: August 25, 2016.
Brent J. Fields,
Secretary.
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[FR Doc. 2016-20832 Filed 8-31-16; 8:45 am]
BILLING CODE 8011-01-C